Sep 072014
 September 7, 2014  Posted by at 7:07 pm Finance Tagged with: , , , ,  2 Responses »

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.


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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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 (

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: , , ,  11 Responses »

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: , , ,  11 Responses »

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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Jul 012014
 July 1, 2014  Posted by at 3:13 pm Finance Tagged with: , , ,  5 Responses »

G. G. Bain Gloria Swanson in New York Sep 4, 1924

We all know that interest rates are at an ultra low level, whether it’s the rate on our savings accounts, our mortgages (though those are quite a bit higher, quelle surprise), central bank rates or yields on government bonds. All this, plus a watershed of global QEs, have led to stock exchanges at highs that have nothing at all to do anymore with the performance of the real economies they’re supposed to represent – and historically did.

Add to that that on stock exchanges, trading volumes are as ultra low as interest rates are, and from what trading is left, a substantial part is machines, i.e. high frequency, and we have a pretty clear idea of just how distorted our picture of our economies have become. We no longer have a clue what really happens, since we don’t know what is worth what. Share prices tell us nothing about a company’s performance, since any strength that is does appear to have left may as well stem from cheap credit borrowed at those same ultra low rates and used for stock buybacks and other purely financial moves.

Still, wouldn’t it be nice to know, from a historical perspective, exactly how low have interest rates become? I saw a nice example today on Dutch business channel RTL-Z. The yield on the 10-year bond in Holland was 1.476% today. Which is not just the lowest the Dutch paid in the past 25 years:

But even in the past 500 years:

You wouldn’t even expect to see such rates in even the most buzzing or otherwise extreme economies, let alone in one that’s as anemic, other than in stock markets, as ours are today. To wit: purchasing managers indices (PMIs) in Europe all fell again today. Perhaps we need to recognize that today’s economy is indeed a very extreme one.

And if you get the feeling from what’s going on that in order for the central banks to be able put lipstick on their pig, they have to kill it in the process, you’re not far off at all. They’ve largely killed bond markets, and not much is left of equity either, as we saw yesterday. The only thing that keeps the zombie pig going is debt, and more debt.

But we shouldn’t forget that the financial world, which can be made to – seem to – show “healthy” growth this way, demands more growth each year, that it’s an exponential growth rate we’re talking about. And that, even central banks cannot deliver. Not for long.

I had an email exchange with Jeffrey Brown recently, since I wondered if he had updates available on his Export Land Model, which deals with declining amounts of oil available for export from oil producing countries, because of depletion rates and relentlessly rising domestic consumption. Jeffrey’s a longtime – and very smart – oil geologist also known as Westexas whom we know from our Oil Drum days. I couldn’t figure out a good way to write up what he sent me back then, but I’ll give it a shot after seeing something he wrote the other day in reply to an article on, North Dakota and the Bakken by County.

Jeffrey uses terms like Global Net Exports, Avalaible Net Exports, Cumulative Net Exports and Chindia’s Net Imports. That may look confusing at first glance, but it does make a lot of sense once you think about it. The overall idea is that even if total global oil production would not decline, an argument all too easily made by the shale faithful, oil available for sale in global markets would still fall rapidly, because of those domestic consumption numbers (oil producing countries grow both their economies and populations) and because of the surging demand from the 2.5 billion people living in China and India. This is how he puts – part of – the overall picture:

Of course, the really crazy low number is my estimate for the remaining volume of Available CNE (Cumulative Net Exports), i.e., the estimated cumulative remaining volume of GNE (Global Net Exports) available to importers other than China & India.

Available Net Exports (ANE), or GNE less CNI (Chindia’s Net Imports), were 41 mbpd in 2005 (or 15 Gb/year). Based on the 2005 to 2012 rate of decline in the GNE/CNI Ratio, I estimate that post-2005 Available CNE are on the order of about 170 Gb. At the 2005 rate of consumption in ANE, estimated post-2005 Available CNE would be depleted in about 12 years (analogous to a Reserve/Production Ratio).

From 2006 to 2012, cumulative ANE were about 95 Gb, which would put estimated remaining Available CNE at about 75 Gb at the end of 2012. At the 2012 rate of consumption in ANE, estimated remaining Available CNE would be depleted in about 6 years , i.e., the total estimated volume of Global Net Exports of oil available to about 155 net oil importing countries would be totally gone in 6 years (about 2,200 days). Of course, the expectation is for an ongoing decline in ANE, and the current extrapolated data suggest that ANE would theoretically approach zero around the year 2030.

As someone once said, what can’t continue tends not to continue, and there is no way we would have a functioning global economy if two countries consumed anything close to 100% to Global Net Exports of oil, but here’s the problem: Given an inevitable ongoing decline in GNE, unless the Chindia region cuts their GNE consumption at the same rate as the rate of decline in GNE, or at a faster rate, the resulting ANE decline rate will exceed the GNE decline rate, and the ANE decline rate will accelerate with time. It’s a mathematical certainty.

In any case, the projected rate of decline in the GNE/CNI Ratio puts us at a point in 2030 at which we cannot arrive, but the 2013 data will almost certainly show that we continued to slide toward a point at which we cannot arrive:

Quite the conundrum.

What we take away from this is that China and India’s demand for oil is rising so fast, in perhaps 10 years’ time available oil in the markets will either go to them or it will go to us, but not to both. Time to prepare to fight over the stuff, and make it unavailable for the poor at the same time?!

But only if there’s a profit in it.

Admitting Problem Is First Step as HSBC Ditches ‘Optimism Bias’ (Bloomberg)

If recovery starts by admitting you have a problem, then HSBC economists are taking the first step. They say they’ve overestimated global growth prospects for each of the last three years by being too upbeat after the 2008 financial crisis. They’re now taking corrective action. “There is an optimism bias, largely reflecting an attachment to pre-crisis growth trends which, post-crisis, have mostly remained out of reach,” according to a report published last week by the team led by Stephen King, HSBC’s global head of economics and asset-allocation research. “Our latest projections are consistent with this sense of ennui.” HSBC hasn’t been alone. Its economists found that since the crisis their industry’s average estimate of inflation proved off by at least 1 percentage point in the U.S., U.K., Sweden and Spain and by 0.7 point in Germany. Those are big misses given that most major central banks target 2% inflation.

Divining growth has also flopped. In the U.S., for example, economists reckon expansion should be as much as 3% in the long run, yet it has averaged just 2% since 2000, according to HSBC. HSBC economists have cut their forecasts for global growth in each of the past three years. They did so again last week in reducing their 2014 forecast to 2.4% from 2.6%, which was down from the 2.8% seen at the end of 2012. The list goes on: Printing money was supposed to lead to higher inflation, yet hasn’t. A run-up in equity prices has failed to ignite economic activity, and house prices are booming even with weak inflation. Behind the errors lay a reliance on “simple rules of thumb,” say the London-based King and his colleagues. Economists are suffering from a bias toward optimism that suggests economic drivers are the same now as before 2008.

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Tricks and sleeves.

The Purpose Of The Fed’s Reverse Repo: Window Dressing (Zero Hedge)

If there ever was any question as to what the purpose of the Fed’s Reverse Repo liquidity facility was, or is, the amount of reverse repos issued by the Fed to make banks appear healthier than they are and to cure whatever “high quality collateral” shortfalls banks are now chronically experiencing, should slam the door shut on any future debate just what the motive behind the Reverse Repo is.

Behold: a record $340 billion in reverse repos submitted by the world’s financial institutions with the Federal Reserve, an increase of $200 billion overnight, and amounting to a record $3.5 billion on average among the 97 operations participants. Considering this is a clear quarterly event, it goes without saying that all the reverse repo is, is a quarter-end window dressing mechanism underwritten by Mr. Chairmanwoman itself. That there was some $200 billion in excess reserve liquidity as of yesterday’s market close (which today was handed over to the Fed in exchange for one day rental of Treasurys), or that banks actually have a third of a trillion gaping shortfall in collateral, hardly needs discussion. Expect total reverse repo usage tomorrow to plunge by at least $150 billion as the banks will have fooled their regulator, which also happens to be the Fed, that they are safe and sound. Rinse, repeat, until the entire financial system collapses once again and people will ask “how anyone could have possibly foreseen this.”

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California Housing And The Bubble At Hand (Stockman)

Janet Yellen is an officious school marm. She constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth—-embodying the sweat of labor, the consumption of capital and the fruits of enterprise – to magically expand beyond what the free market would generate on its own steam. In a fit of professorial arrogance, Bernanke even had the gall to call this the helicopter money process. His contention was that the rubes on main street would happily scoop up the falling bills and coins and soon “spend” the economy into a fit of expansion.

In other words, according to Bernanke the essential ingredient in economic life is money demand, which is a gift of the state’s central banking branch, rather than production, savings, innovation and enterprise, which arise on the free market in consequences of millions of workers and businesses pursuing their own ends. Indeed, under Keynesian dogma the latter can be taken for granted; the supply of labor, enterprise and output is automatic and endless until an ethereal quantity called potential GDP is fully realized. To achieve the latter requires that the state dispense exactly the right level of money demand so that the rubes on main street will not stubbornly remain poorer than they need be. This unhappy estate happens, of course, owing to their inexorable propensity to withhold the production and enterprise of which they are capable (i.e. keep plants idle and labor unemployed).

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Tolerate? You mean create.

The Secret Reason The Fed Is ‘Tolerating’ Bubbles (TPit)

Swiss megabank UBS, one of the great beneficiaries of the Fed’s policies, ponders in its latest FX Comments how to deal with asset bubbles, “most importantly in housing markets,” a topic that is a “hotly debated issue among central banks.” Turns out, after nearly six years of printing money and inflicting ZIRP and financial repression on most developed economies, thus creating these asset bubbles in the first place, central bankers find themselves “essentially in an experimental phase.” Shouldn’t they have thought about this before? It seems. But publically, the Fed and other central banks are still vociferously denying that there are any asset bubbles.

In fact, the Fed prides itself in having “healed” the housing market: prices in many cities, including San Francisco, are now substantially higher than they were at the craziest peak of the last housing bubble. So in this environment of pandemic central-bank bubble-denials, UBS writes that “policymakers around the world are struggling with potential asset bubbles” that are “a logical and inevitable consequence of historically unprecedented monetary policies.” It took nearly six years to figure this out? The report goes on:

Asset prices have indeed in many cases reached stunning levels, quite obviously out of line with ‘fundamentals,’ for example in credit or government bond markets. The most dangerous of bubbles are deemed to be those in housing markets as their bursting could wreck whole economies.

Given central-bank focus on enriching those who hold financial assets, identifying asset bubbles is, according to UBS “notoriously difficult.” In fact, it’s larded with risks: once central banks officially identify asset bubbles – not just a little “froth” – they have to do something about them or lose what is termed, as if it had been a great insider joke all along, their credibility. But from the point of view of those who hold these bubbly assets, there is never a right time. They’re their wealth bubbles that would get pricked. So “tolerating them for a bit longer might look tempting given the risk of pricking them at the wrong time,” UBS muses. But even the IMF, the official international bondholder bailout organ, had warned in June that “the era of benign neglect of house price booms is over.”

So how can central banks stop these bubbles they created, while denying that they exist, and even if they did exist, that central banks created them? It’s a bit of a quandary. One option would be to stop printing money and raise interest rates, the classic maneuver, “which would typically have been seen as the first, and possibly only, line of defense,” UBS explains wistfully. But it would wreak all sorts of havoc on the financial markets and deflate the wealth of those who’ve benefited from the money-printing binge.

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Nice story there.

EU Emergency Credit Line Can’t Halt Fear Of Bulgaria Bank Run (Guardian)

Dozens of depositors have withdrawn savings from Bulgaria’s third biggest bank despite assurances from the government and the European Union that their money was safe after a similar run shut down another major lender last week. Bulgarian authorities have arrested four people suspected of trying to destabilise the banking system in a concerted phone and internet campaign. However, the queues forming to withdraw cash have thrown a spotlight on weak economic governance in the EU’s poorest state. A credit line of 3.3bn levs (£1.3bn), requested by Bulgaria, was approved on Monday by the European commission. The EU executive, echoing the International Monetary Fund and economists, said the Bulgarian banking system was “well capitalised and has high levels of liquidity compared to its peers in other member states” of the 28-nation bloc.

President Rosen Plevneliev urged Bulgarians to keep faith with the banks in a national appeal on Sunday after emergency talks with political party leaders and central bank officials. “There is no cause or reason to give way to panic. There is no banking crisis, there is a crisis of trust and there is a criminal attack,” he said. Queues formed nevertheless outside branches of First Investment Bank, although they were smaller than on Friday. The lender says it has sufficient capital to meet clients’ demand. “I am here because I remember what happened nearly 20 years ago,” said one woman aged about 60 who gave her name only as Gergana. She was referring to a financial crisis in 1996-7 which sparked hyperinflation and the collapse of 14 banks. About two-thirds of Bulgaria’s banks are now foreign-owned, in sharp contrast to the mid-1990s.

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Don’t worry, someone will come up with a positive spin.

Eurozone Unemployment Stuck, ‘Recovery’ Stalls (CNBC)

The euro zone’s unemployment rate held steady in May, at 11.6%, in a further sign that the region’s bumpy recovery is struggling to take hold. It followed separate data which revealed that manufacturing activity in the euro zone slid to a seven-month low in June. Some 18.55 million people were unemployed across the currency bloc in May, according to Eurostat data published Tuesday, a fall of 28,000 from April. However this reduction in joblessness was not enough to drive the unemployment rate lower. The lowest unemployment rates were recorded in Austria and Germany, at around 5%. However joblessness remained worryingly high in Greece (26.8% in March 2014) and Spain (25.1%). The youth unemployment rate, meanwhile, came in at 23.3% for the euro zone in May. Joblessness among the under-25s was a particular issue in Greece, Spain and Croatia where the most recent figures put youth unemployment at 57.7%, 54% and 48.7% respectively.

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Good graphs from Blodget.

It’s Time To Remind You About The Possibility Of A Stock Market Crash (BI)

The stock market has had another good year so far. Despite concerns about high prices (from people like me), stocks have meandered higher over the past 6 months. And they are now, once again, setting new all-time highs. That’s good for me, because I own stocks. But I’m not expecting this performance to continue. In fact, the higher stocks move, the more concerned I get about a day (or days) of reckoning. Why? Because the higher stocks move, the farther their prices get farther away from the long-term average. This doesn’t mean the market will crash anytime soon — or ever. But it does mean that, unless it’s “different this time,” stocks are likely to perform very poorly from this level over the next 7-10 years. And it’s not just price that concerns me. There are three basic reasons I think future stock performance will be lousy:

  • Stocks are very expensive
  • Corporate profit margins are still near record highs
  • The Fed is now tightening

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Like the title, but don’t get your hopes up, this is from dumb-dumb right wing Telegraph. Still, even Jeremy Warner sees that it’s all debt, and debt only. But he still thinks the UK has enough growth anyway …

We Must End This Addiction To Debt As The Engine Of Growth (Telegraph)

Growth is back – after a fashion – but debt levels are rising again, productivity growth in advanced economies is close to post- war lows, capital spending is becalmed, and in Britain, inroads into deep fiscal and current account deficits are proceeding only at glacial pace. Is this a sustainable economic model? The answer from the venerable Basel-based Bank for International Settlements is a definitive no. “As history reminds us, there is little appetite for taking the long-term view”, the BIS thunders in its latest annual report. “Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms. Or to address balance sheet problems head-on during a bust when seemingly easier policies are on offer. The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end”.

As you can see, the BIS has lost none of none of its penchant for dampening any suggestion of better times to come with another bucket load of gloom. The BIS is, if you like, the conscience of markets, bankers and policymakers, so pessimism and proselytising come naturally. It is the BIS’s job to warn of developing economic risks, however clement the conditions outside seem to be. This gives the central banks’ banker the characteristics of a stopped clock. Much of the time, it is going to be wrong, with the natural exuberance and animal spirits of markets oblivious to its warnings. Twice a day, however, it is going to be right, as indeed it was about the financial crisis, when it came closer than any to predicting the maelstrom to come.

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GM recalls more than the company’s combined U.S. sales for the years 2005 through 2013 … What sort of business are they in?

GM to Recall 8.45 Million More Vehicles in North America (WSJ)

General Motors recalled another 8.5 million vehicles on Monday, including more than 8 million for ignition-switch defects, and said it knew of three deaths in accidents involving the affected cars. The nation’s largest auto maker also boosted its projected charge to earnings for recalls in the current quarter by $500 million to $1.2 billion. Monday’s action boosts to about 29 million cars and trucks that GM has recalled in North America this year – a number greater than the company’s combined U.S. sales for the years 2005 through 2013. The auto maker said it knows of seven crashes, eight injuries and three fatalities involving the cars recalled for the new ignition-switch problems, which includes models as old as 1997.

The fatalities occurred in two crashes involving Chevrolet Impalas in which the air bags failed to deploy, a GM spokesman said. There is no conclusive evidence that the defect caused those crashes, the company said. GM said its dealers will fix the ignition problem by converting the slot on the vehicles’ key head to a small hole, reducing the potential for swinging key chains to move the ignition out of the run position while the cars are being operated. [..] The National Highway Traffic Safety Administration said the ignition defects in the latest round of cars “can result in the air bag not deploying in the event of a crash. Until this recall is performed, customers should use only the ignition key with nothing else on the key ring when operating the vehicle.” The Detroit-based car maker spent $1.3 billion in the first quarter to cover recall costs. The updated second-quarter charge, previously pegged at $700 million, brings the total charges for recall repairs to $2.5 billion this year.

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They’re TBTF anyway.

After BNP, US Targets Range Of Firms On Illicit Money Flows (Reuters)

BNP Paribas’ guilty plea and agreement to pay nearly $9 billion for violating U.S. sanctions is part of a larger U.S. Justice Department shift in strategy that is expected to snare more major banks and other firms across the financial food chain. Two other major French banks, Credit Agricole and Societe Generale, Germany’s Deutsche Bank, and Citigroup’s Banamex unit in Mexico are among those being investigated for possible money laundering or sanctions violations, according to people familiar with the matter and public disclosures. The Justice Department and other U.S. authorities, including the Manhattan District Attorney, are probing Credit Agricole and Societe Generale for potentially violating U.S. economic sanctions imposed against Iran, Cuba and Sudan, one of the sources said. Credit Agricole and SocGen have disclosed that they are reviewing whether they violated U.S. sanctions.

SocGen said in its latest annual report that it is engaged in discussions with the Treasury Department’s Office of Foreign Assets Control over potential sanctions violations. Another source said the Justice Department’s bank integrity unit is deep into a probe of whether Citigroup’s Banamex operation failed to police money transfers across the U.S.-Mexico border. Citigroup has said it is cooperating with the inquiry, which also involves the Federal Deposit Insurance Corp. Separately, Citigroup is investigating an alleged fraud involving $565 million in loans at Banamex and as a result of that has fired a dozen employees. Prosecutors have also investigated potential sanctions breaches at Deutsche Bank, according to people familiar with the probe, though it is unclear how far that has progressed. The bank said in its last annual report that it had received requests for information from regulatory agencies and is cooperating with them.

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Saw that coming from 20,000 miles away.

China Regulators Use Creative Accounting To Boost Bank Lending (Bloomberg)

Chinese regulators increased banks’ capacity to lend money and bolster the slowing economy by changing the way loan-to-deposit ratios are devised. Banks from today can include in the calculation negotiable certificates of deposit sold to companies or individuals, the China Banking Regulatory Commission said in a statement yesterday. They can also exclude loans advanced to small enterprises and the rural sector that are backed by bonds, the CBRC said. Bank lending is capped at no more than 75% of deposits to prevent an overextension of credit. The changes in calculation may allow lenders such as Bank of Communications, which was approaching its limit under the previous methodology, to lower its ratio and advance more loans. Premier Li Keqiang is seeking to cut funding costs and feed credit into the world’s second-largest economy, which is forecast to expand in 2014 at the weakest pace in 24 years.

Easing the loan-to-deposit requirements “will help amplify lending, especially for banks that focus on small and medium-sized enterprises,” Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co., said by phone. “This is an extension of the latest round of targeted easing.” Bank share performance was mixed today as the change fell short of market expectations for the inclusion of some interbank deposits in the calculation, according to analysts at HSBC and China International Capital. Banks can also exclude from the ratio calculation some loans backed by bonds with at least one year of maturity, and credit backed by funding from international financial organizations and foreign governments, the CBRC said. Rural banks can take out loans funded by their largest shareholder that were offered to farmers and smaller companies. Locally incorporated foreign banks can include among their deposits funding put in place by their parents for more than a year, according to the statement.

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Just what we need: more bank profits. Guess who pays.

Global Bank Profits Hit $920 Billion As Chinese Lenders Boom (Reuters)

China’s top banks accounted for almost one-third of a record $920 billion of profits made by the world’s top 1000 banks last year, showing their rise in power since the financial crisis, a survey showed on Monday. China’s banks made $292 billion in aggregate pretax profit last year, or 32% of the industry’s global earnings, according to The Banker magazine’s annual rankings of the profits and capital strength of the world’s biggest 1,000 banks. Last year’s global profits were up 23% from the previous year to their highest ever level, led by profits of $55 billion at Industrial and Commercial Bank of China (ICBC). China Construction Bank, Agriculture Bank of China and Bank of China filled the top four positions.

Banks in the United States made aggregate profits of $183 billion, or 20% of the global tally, led by Wells Fargo’s earnings of $32 billion. Banks in the eurozone contributed just 3% to the global profit pool, down from 25% before the 2008 financial crisis, the study showed. Italian banks lost $35 billion in aggregate last year, the worst performance by any country. Banks in Japan made $64 billion of profit last year, or 7% of the global total, followed by banks in Canada, France and Australia ($39 billion in each country), Brazil ($26 billion) and Britain ($22 billion), The Banker said.

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Two articles that write up the same gloomy report.

Insurer Warns Some Pooled Pensions Are Beyond Recovery (NY Times)

More than a million people risk losing their federally insured pensions in just a few years despite recent stock market gains and a strengthening economy, a new government study said on Monday. The people at risk have earned pensions in multiemployer plans, in which many companies band together with a union to provide benefits under collective bargaining. Such pensions were long considered exceptionally safe, but the Pension Benefit Guaranty Corporation reported in its study that some plans are now in their death throes and cannot recover. Bailing out those plans seems highly unlikely. But if they are simply left to die, the collapse of the federal insurance program is all but inevitable, the report said, leaving retirees in failed plans with nothing.

It added that the program “is more likely than not to run out of money within the next eight years” as plan after plan collapses. The multiemployer pension sector, which covers 10 million Americans, represents a mixed bag of financial strength and weakness. The aging of the work force, the decline of unions, deregulation and two big stock crashes have all taken a grievous toll. Ten percent of the people covered are in severely underfunded plans, the study said. The federal insurer is not making any recommendations about what to do at the moment, said Joshua Gotbaum, its director. “This is a legally required actuarial report whose purpose is solely to project the range of outcomes for plans and the P.B.G.C.”

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Federal Pension Plan Safety Net Faces Severe Funds Squeeze (WSJ)

The federal safety net for a type of private-sector pension plan common in the transportation, construction and other industries is at risk of collapse in coming years, according to a report released Monday. Such an outcome has the potential to affect more than a million people. The federal Pension Benefit Guaranty Corp. program that covers multi-employer pensions “is more likely than not to run out of funds in eight years, and highly likely to do so within 10 years,” the agency said in releasing new projections. The PBGC collects insurance premiums from employers that offer the pensions and helps retirees in insolvent plans by paying them reduced pensions. But the likely failure of several big plans means that the PBGC’s limited resources for helping retirees in failed multi-employer plans likely will be tapped out in coming years.

This year’s report estimates that the $8.3 billion long-term deficit the federal backup plan for multi-employer plans faced in fiscal year 2013 will widen to $49.6 billion by fiscal year 2023. The deficits don’t mean that the backup plan can’t pay now. The PBGC’s new projections “show that insolvencies affecting more than a million of the 10.4 million people in multi-employer plans are now both more likely and more imminent,” the PBGC said. This year’s PBGC projections rely on a new methodology that the agency regards as more realistic about what troubled pension funds can and can’t do to shore themselves up—for instance, plans could raise employer-contribution requirements, but that would tend to drive off remaining participants, accelerating the downward spiral. The options for lawmakers are politically difficult. Bailouts of troubled plans or of the safety-net program itself could spark a backlash among voters, while forcing benefit cuts on beneficiaries—particularly current retirees—would be painful and unpopular.

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No kidding.

Ancient Baby Boom Reveals Dangers Of Population Growth (HNGN)

Researchers mapped out one of the oldest-known baby booms in North American history. The “growth blip” occurred among southwestern Native Americans between 500 and 1300 A.D. A crash in the baby boom is believed to have followed soon after, Washington State University reported. To make their findings the researchers looked at data on thousands of remains from hundreds of sites across the U.S. The team assembled a detailed Neolithic Demographic Transition in which the area’s stone tools reflect a cultural transition from cutting meat to pounding grain. “It’s the first step towards all the trappings of civilization that we currently see,” Tim Kohler, WSU Regents professor of anthropology, said. Maize is believed to have been grown in the region as early as the year 2000 B.C., by 400 B.C. the crop is believed to have made up 80% of the peoples’ calories. At this time birth rates were on the rise, and continued to climb until 500 A.D.

Around 900 A.D. populations remained high but birth rates started to fluctuate. One of the largest-known droughts occurred in the Southwest occurred in the mid-1100s. Even in this time of conflict birth rates remained high. “They didn’t slow down — birth rates were expanding right up to the depopulation,” Kohler said. “Why not limit growth? Maybe groups needed to be big to protect their villages and fields.” “It was a trap,” he said. “A Malthusian trap but also a violence trap.” The northern southwest contained about 40,000 people mid-1200s, but only 30 years later it was mysteriously empty. The population may have been too large to feed itself as the climate changed, causing the society to collapse. As people began to leave it would have been difficult maintain the social unity required for the population to defend themselves and obtain new infrastructure. “Population growth has its consequences,” the researcher said.

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“The Colorado is essentially a dying river. Ultimately, Las Vegas and our civilisation in the American South West is going to disappear, like the Indians did before us.”

The Race To Stop Las Vegas From Running Dry (Telegraph)

Outside Las Vegas’s Bellagio hotel tourists gasp in amazement as fountains shoot 500ft into the air, performing a spectacular dance in time to the music of Frank Sinatra. Gondolas ferry honeymooners around canals modelled on those of Venice, Roman-themed swimming pools stretch for acres, and thousands of sprinklers keep golf courses lush in the middle of the desert. But, as with many things in Sin City, the apparently endless supply of water is an illusion. America’s most decadent destination has been engaged in a potentially catastrophic gamble with nature and now, 14 years into a devastating drought, it is on the verge of losing it all. “The situation is as bad as you can imagine,” said Tim Barnett, a climate scientist at the Scripps Institution of Oceanography. “It’s just going to be screwed. And relatively quickly. Unless it can find a way to get more water from somewhere Las Vegas is out of business. Yet they’re still building, which is stupid.”

The crisis stems from the Las Vegas’s complete reliance on Lake Mead, America’s largest reservoir, which was created by the Hoover Dam in 1936 – after which it took six years to fill completely. It is located 25 miles outside the city and supplies 90% of its water. But over the last decade, as Las Vegas’s population has grown by 400,000 to two million, Lake Mead has slowly been drained of four trillion gallons of water and is now well under half full. […]

100% of California is now classified as in “severe drought” and rivers are so low 27 million young migrating salmon are having to be taken to the ocean in trucks. Nevada and California are just two of seven states that rely for water on the 1,450-mile Colorado River, which rises in the Rocky Mountains and used to empty into the Gulf of California in Mexico – but which now rarely reaches the sea, running dry before that. In 1922 seven US states – California, Nevada, Arizona, Wyoming, Utah, Colorado and New Mexico – first divided up how much river water each could use, and the amounts have been bitterly contested ever since, including by Mexico, which also takes water from it. One proposal is for landlocked Nevada to pay billions of dollars to build solar-powered desalination plants in the Pacific off Mexico, taking Mexico’s share of Colorado River water in exchange. But Mr Mrowka said: “The Colorado is essentially a dying river. Ultimately, Las Vegas and our civilisation in the American South West is going to disappear, like the Indians did before us.”

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More sad.

Emperor Penguins Waddling To Extinction (AFP)

Global warming will send Antarctica’s emperor penguins into decline by 2100, scientists project, calling for the emblematic birds to be listed as endangered and their habitat better protected. The world’s largest penguin species came to global fame with a 2005 documentary, March of the Penguins, portraying their annual trek across the icy wastes, and the 2006 cartoon movie Happy Feet. The new study sheds light on the birds’ reliance on sea ice for breeding and raising their young. The ice also protects their prey – fish and krill – by maintaining the food chain. Declining sea ice caused by climate change would place all 45 known emperor penguin colonies into decline by 2100, according to the population simulation.

“At least two-thirds (of colonies) are projected to have declined by (more than) 50% from their current size” by the end of the century, said the paper published in the journal Nature Climate Change. Dynamics differ between colonies, but “the global population is projected to have declined by at least 19%,” after growing 10% up to 2048, it added. The team said colonies located between the eastern Wedell Sea and the western Indian Ocean will see the biggest declines, while those in the Ross Sea will be least affected. In fact, the Ross Sea penguin population will continue to grow until 2100, after which the trend will reverse. “Our results indicated that at least 75% of the emperor penguin colonies are at least vulnerable to future sea ice change, and 20% will probably be quasi-extinct by 2100,” the paper said.

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Long and detailed article, part 1 of a series.

The Human Cost Of China’s Untold Soil Pollution Problem (Guardian)

Soil pollution has received relatively little public attention in China. Despite the fact that it poses as big a threat to health as the more widely covered air and water pollution, data on soil pollution has been so closely guarded that it has been officially categorised as a “state secret”. Until recently the Chinese government also resisted media efforts to draw attention to local cancer epidemics in China’s newly industrial areas. It was not until February 2013 that the Ministry of Environmental Protection (MEP) finally admitted that “cancer villages” existed in China, and released a list that included the area around Lake Tai and the villages of Fenshui and Zhoutie. Some civil society experts have estimated that there are 450 cancer villages in China, and believe the phenomenon is spreading.

The story of the cancer hotspot of Yixing is characteristic: in the rush to develop that engulfed China from the 1990s, local officials were eager to invite factories and chemical plants into the area, and their already weak environmental controls were often disregarded entirely. “Government officials just care about GDP,” Zhang complained. “They were happy to welcome any polluting firm.” So, for a time, were the villagers who found jobs in the new factories. The first real signs of the troubles to come were in Lake Tai itself, and were the subject of a long campaign by another resident of Yixing township, the fisherman turned environmentalist Wu Lihong. In the early 1990s, Wu grew worried about the deterioration of Lake Tai’s once famously pure waters. He organised a local environmental monitoring group that he called Defenders of Tai Lake, to collect water samples from the lake and its feeder rivers.

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Jun 042014
 June 4, 2014  Posted by at 4:07 pm Finance Tagged with: , , , ,  9 Responses »

Barbara Wright Damaged Lives, Knoxville, Tenn., 1941

The Fed itself has stated many times over the past years that it intends to keep interest rates low. And now it starts complaining about low volatility. It looks like Yellen et al want to have their cake and eat it too. Perhaps they should have paid a little more attention to Hyman Minsky. Who long ago wrote – paraphrased – that if and when markets are perceived as being stable, it’s that very perception will make them unstable, because stability, i.e. low volatility, will drive investors into riskier asset purchases. The Fed’s manipulation-induced ultra-low rates have achieved just that, and now they’re surprised?

They are the ones who pushed down rates and threw trillions in QE on top of those low rates, and they had no idea that could create asset bubbles and increase risk-taking? Some of this stuff is simply wanting in credibility. But then, any and all manipulations of markets are poised to end badly, and certainly when the manipulators claim to represent, and function in, a free market.

Now they want more volatility, something that could be achieved by raising rates, especially if it’s done without all the forward guidance, but that would put the housing sector – or the housing bubble really – at risk, as well the “recovery” no-one is yet prepared to let go of. So all the Eccles occupants have left is words. They can try forward misguidance, leave the option open of surprise moves in oder to catch investors off guard. Sort of like a poker game.

The problem with that is no-one would believe that Yellen is a better poker player than even the average investor. Another problem is such intentional insecurity would hit the housing market, and stocks, anyway. You can coerce the most gullible American into buying a property if (s)he thinks rates will remain low, but not if you take away that belief.

The essence of what Minsky said is deceptively simple, and perhaps that’s why it’s so poorly understood: it’s not possible to “create” a stable market, because the very moment you try, you create its opposite, instability. Minsky’s financial instability hypothesis is quite clear, and frankly, if you don’t believe him you should first prove him wrong before trying to do what he says can’t be done anyway. If you feel you need to provide forward guidance because markets are weak and you think they’ll strengthen if you say you’ll keep rates at a certain level, you need to realize that the stability you’ve trying to convey will of necessity be self destructive.

Markets need uncertainty to be able to function properly. That’s what Minsky said. And trying to take away that uncertainty with forward guidance and trillions of dollars is a move that cannot end well. Markets are populated with people, and if you take uncertainty out of people’s individual lives, there’s no telling what they’ll do either, other than it’s certain they’ll increase the risks they take. And why not, if they think nothing can happen to them? If you’re young and feel invincible, why not down 20 shots of tequila in an hour or jump off a cliff? It’s a matter of risk assessment.

But we don’t need to get into psychology here, it’s very easy to see why Minsky was dead on. And it’s equally easy to understand why what follows from that is that the Fed, or any central bank or government, should stay away from manipulating the free markets they so favor but which are no longer free the moment the manipulation starts. If and when investors, be they pension fund managers or just people looking to buy their first home, are barred though central bank manipulation from discovering what an asset, any asset, is actually worth, and that’s where we find ourselves at the moment, a world of uncertainty is waiting for us. There is no other option.

We live in a control economy today, and we have no reasons to do that other than the Fed seeking to protect their banker friends from revealing their losses and their balance sheets. Because that’s what at stake here: if Yellen takes her fingers of the keyboard, and so does the Treasury, we’ll see a truth finding process that will wipe out some of the big players, and lots of small ones, like recent mortgage borrowers who‘ve bought in on artificially elevated price levels.

That will be hurtful, but we should understand that it’s inevitable that one day the truth shall be told. Maybe not about who shot JFK, but certainly about what your home is truly worth. The longer we postpone that day, the poorer our poor will be and the more of us will be among the poor. And that in turn will tear our societies apart, which won’t benefit anyone, not even those who escaped with the loot. Tell me again, what other purpose does the Fed serve but manipulating markets?

I don’t see any, and if I’m right, and so is Minsky – and he is – , we have ourselves a situation on our hands. I am certain there are people inside the Fed who have read, and understood, Minsky’s financial instability hypothesis. What kind of light does that shine on them, as they continue to be accessories to current policies?

Wait a minute. What about my recovery?

First Quarter Corporate Profits Tumble Most Since Lehman (Zero Hedge)

As SocGen’s Albert Edwards conveniently points out, during the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis’s (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!

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Look beyond the S&P and it’s like a bomb went off.

The Average Russell 2000 Stock Is Down 22% From Its Highs (Zero Hedge)

It’s hard to “fully commit” to this rally given “corroded internals,” warns FBN Securities technical analyst JC O’Hara in note. As we previously noted, new highs are extremely negatively divergent from the index strength, as are smarket money flows, but what has O’Hara “very disturbed” is the fact that the average Russell 2000 stock is over 22% below its 52-week highs. As O’Hara notes, investors are ignoring “technical signals that have historically forewarned” of a drop; they’re “jumping onto a plane where only one of the two engines is working. The plane does not necessarily have to crash but the risk of an accident is much higher when the plane is not firing on all cylinders.”

“Smart money” Flow is decidely the wrong way…

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I had no idea …

Fed Officials Growing Wary of Market Complacency (WSJ)

Federal Reserve officials are starting to wonder whether a tranquillity that has descended on financial markets is a sign that investors have become unafraid of the type of risk that could lead to bubbles and volatility. The Dow Jones Industrial Average, up a steady if unspectacular 1% since the beginning of the year, has consolidated big gains registered last year. The VIX, a measure of expected stock-market fluctuations based on options trading, has gone 74 straight weeks below its long-run average—a string of steadiness not seen since 2006 and 2007, before the financial crisis and recession. Moreover, the extra return that bond investors demand on investment-grade corporate debt over low-risk Treasury bonds, at one%age point, hasn’t been this low since July 2007. The lower this “spread,” the less risk-averse are bond investors.

The Fed’s growing worry—which could influence future interest rate decisions—is that if investors start taking undue risk it could lead to economic turbulence down the road. “Volatility in the markets is unusually low,” William Dudley, president of the Federal Reserve Bank of New York and a member of chairwoman Janet Yellen’s inner circle, said after a speech last week. “I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they’ll take more risk than really what’s appropriate.” One example of increased risk taking: Issuance of low-rated U.S. dollar-denominated junk bonds last year hit a record $366 billion, more than twice the level reached in the years before the 2008 financial crisis, according to financial-data provider Dealogic.

Richard Fisher, president of the Federal Reserve Bank of Dallas, added to the chorus of concern over complacency in an interview Tuesday. “Low volatility I don’t think is healthy,” he said. “This indicates to me a little bit too much complacency that [interest] rates are going to stay at abnormally low levels forever.” Many officials appear more inclined to talk about market risks than act to pre-empt them given the worry about cutting off a fragile recovery with early interest-rate hikes. Though risk-taking is on an upswing, they don’t see a buildup of serious threats to the broader stability of the financial system. Fed officials are expected at their June meeting to keep gradually scaling back their purchases of mortgage and Treasury bonds and stick to the plan to keep short-term interest rates near zero, where they have been since the height of the financial crisis in late 2008.

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Payment-in-kind notes are a silly risk raising “product” that offers a bit more yield in exchange for crazy risks: “We call it the yield-hunger games … ”

Sales Of Boom-Era ‘PIK’ Debt Soar (FT)

The sale of complex debt products popular in the pre-crisis boom years has soared in 2014 as investors have embraced riskier assets in exchange for higher returns. Issuance of US-marketed payment-in-kind notes – which give a company the option to pay lenders with more debt rather than cash in times of crisis – has almost doubled so far this year to reach $4.2bn, according to Dealogic. That is the highest amount since the same period of 2007, when a record $5.6bn in PIK notes were sold. The esoteric debt structures were a popular way for companies to finance big leverage buyouts during the boom era that defined the 2006-2007 credit bubble. More recently, investors in PIK notes have been encouraged by low corporate default rates and the chance to earn some additional returns.

“We call it the yield-hunger games,” said Matt Toms, head of US public fixed income for Voya Investment Management. “In this environment of very low yields and very low volatility, any extra yield that products such as these may offer already helps.” On average, PIK notes yield 50 basis points more than comparable high-yield bonds. Average yields on junk-rated bonds stood at 4.99 per cent on Tuesday, according to Barclays indices. A wave of junk-rated borrowers, including Wise Metals, a producer of metal containers, Infor, a software company and Interface Security have included PIK structures as part of new bond deals this year. This week, Jack Cooper, which transports new and pre-owned passenger vehicles, is expected to offer $150m in five-year senior PIK notes.

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I think we all know where QE goes. It’s not us.

Where $1 Of QE Goes: The Untold Story (Cyniconomics)

Sometimes the most interesting results are the ones you didn’t see coming. We recently picked through financial flows data looking for clues about where a dollar of quantitative easing (QE) ends up. For example, we wondered who parts with the bonds that find new homes on the Fed’s balance sheet. Dealers sometimes pass bonds straight from the Treasury to the Fed, but are they buying other QE-ready bonds mostly from households, pension funds, foreigners or other financial institutions? Also, can financial flows help us to guess at how much (if any) a dollar of QE adds to spending? We didn’t expect clear answers and were surprised to stumble across this:

Needless to say, the chart raises a bunch of new questions, such as: • Didn’t the Fed expect QE to complement other types of bank credit? • What do they think of data suggesting it only displaced private sources of credit? • Do they have any other explanations for the results in the chart? Unfortunately, our direct line to the Eccles Building isn’t working this week, which prevents us from answering these questions.

We’re left to form our own conclusions. What to make of the “argyle effect”? Our main takeaway is that the extra reserves created by QE aren’t so much an addition to bank balance sheets as a substitution. The addition story is the one we normally hear. It often leads to confused commentary, such as the mistaken ideas that banks “multiply up” or can “lend out” reserves. (We discussed these fallacies here.) But even without the confused commentary, the addition story doesn’t, well, add up. According to financial flows data, it’s more accurate to say that QE’s extra reserves merely replaced other forms of balance sheet expansion. That’s a substitution story. It’s consistent with the fact that banks can neutralize QE’s effects with derivatives overlays and other portfolio adjustments. They can rearrange exposures to mimic a balance sheet of equal size and risk that’s not stuffed with reserves. (See this related discussion by blogger Tyler Durden.)

Think of it this way: Your banker already knows how many slices of meat he wants in his sandwich. When the Fed shows up with a thick package straight from the deli, it saves him a trip of his own. He still makes the same sized sandwich, but it’s filled mostly by central bankers, and he adjusts it to his liking by varying the condiments. Now, the full picture is more complicated than that, mainly because reserves move from bank to bank. For example, data shows a large amount of QE reserves accumulating at U.S. offices of foreign banks, where they appear to be funded by foreign lenders. You can think of these reserves as a means of recycling America’s current account deficits back into U.S. dollar assets. In other words, QE seems to encourage foreigners to swap other types of dollar assets for reserves at the Fed, supporting the substitution story.

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Trading To Influence Gold Price Fix Was ‘Routine’ (FT)

When the UK’s financial regulator slapped a £26m fine on Barclays for lax controls related to the gold fix, it offered more ammunition to critics of the near-century-old benchmark. But it also gave precious metal traders in the City of London plenty to think about. While the Financial Conduct Authority says the case appears to be a one off – the work of a single trader – some market professionals have a different view. They claim the practice of nudging a tradeable benchmark in order to protect a “digital” derivatives contract – as a Barclays employee did – was routine in the industry. As a result, customers of Barclays and other market-making banks may be looking to see if they too have cause for complaint, according to one hedge fund manager active in the gold market.

“If I was at the FCA I would be looking at all banks trading digitals. This could be the tip of the iceberg – there’s a massive issue with exotic derivatives and barriers.” In the City, digital options are common in the precious metals sector and, especially, in forex trading. A payout is triggered if a predetermined price – or “barrier” – is breached at expiry date. If it is not, the option holder gets nothing. One former precious metals manager at a big investment bank says there has long been an understanding among market participants that sellers and buyers of digitals would try to protect their positions if the benchmark price and barrier were close together near expiry. “These are not Ma and Pa products, they are for super-professionals,” says the former manager. “There’s a fundamental belief that both parties can aggress or defend their book, and I would have expected my traders to do so.”

In the case of gold, this means trying to move the benchmark price, which is set during the twice daily auction “fixing” process run by four banks, including Barclays. That is what the Barclays trader, Daniel Plunkett, did on June 28, 2012. Exactly a year earlier, the bank had sold an options contract to an unnamed customer stating that if after 12 months the gold price were above $1,558.96 a troy ounce, the client would receive $3.9m. By placing a large sell order on the fix, Mr Plunkett pushed the gold price beneath the barrier, thus avoiding the payout. After the counterparty complained, the FCA became involved. Barclays paid the client the $3.9m, and was fined. Mr Plunkett was also fined – £95,600 – and banned from working in the City.

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Now that’s a surprise!

Over Half Of Americans Can’t Afford Their Houses (MarketWatch)

As the housing market slowly recovers, a majority of homeowners and renters are finding it hard to meet rising rents and mortgage payments, new research finds. Over half of Americans (52%) have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years, according to the “How Housing Matters Survey,” which was commissioned by the nonprofit John D. and Catherine T. MacArthur Foundation and carried out by Hart Research Associates. These sacrifices include getting a second job, deferring saving for retirement, cutting back on health care, running up credit card debt, or even moving to a less safe neighborhood or one with worse schools.

[..] … at least 15% of American homeowners (or residents of 78 counties across the country) were living in housing markets where the monthly mortgage payment on a median-priced home requires more than 30% of the monthly median household income – long considered the maximum for rent/mortgage repayments. Housing costs above that threshold are “unaffordable by historic standards,” says Daren Blomquist, vice president at real estate data firm RealtyTrac. In New York county/Manhattan, mortgage payments represent 77% of the median income and in San Francisco County represents 70%. Although mortgage rates are still quite low, down payments, poor credit and tighter lending standards remain three of the biggest hurdles for buying a home, especially among young people, Blomquist says.

“The slow jobs recovery for young adults has made it harder for them to save and to get a mortgage.” Some 84% of young people are delaying major life decisions due to the poor economy, according to a 2013 survey by Generation Opportunity, a nonprofit think tank based in Arlington, Va. About 43% of respondents in the “How Housing Matters Survey” say owning a home is no longer “an excellent long-term investment and one of the best ways for people to build wealth and assets,” and over half say buying a home has become less appealing. Although 70% of renters aspire to own a home, some 58% believe that “renters can be just as successful as owners at achieving the American dream.”

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Too late.

The Only Way To Fairness In Housing Is To Tax Property (Monbiot)

You can judge the extent to which ours has become a rentier economy by the furious response to Ed Miliband’s timid proposals to regulate letting. “Venezuelan-style rent controls,” said the Conservative party chairman, Grant Shapps. “The most stupid and counter-productive policy that we have seen from a mainstream party leader for many years,” stomped Stephen Pollard for the Daily Mail. While Miliband’s proposals would be of some use, they ignore the underlying problem: a consistent failure to tax property progressively and strategically. The United Kingdom is remarkable in that it imposes no land value tax and no capital gains tax on principal residences; and charges council taxes that appear to be the most regressive major levies of any kind anywhere in western Europe.

The only capital tax on first homes is stamp duty, but that recoups a tiny proportion of their value when averaged across the years of ownership. Remarkably, it is imposed on the buyer, not the seller. Why should capital gains tax not apply to first homes, when they are the country’s primary source of unearned income? Why should council tax banding ensure that the owners of cheap houses are charged at a far greater relative rate than the owners of expensive houses? Why should Rinat Akhmetov pay less council tax for his £136m flat in London than the owners of a £200,000 house in Blackburn? Why should second, third and fourth homes not be charged punitive rates of council tax, rather than qualifying, in many boroughs, for discounts?

The answer, of course, is power: the power of those who benefit from the iniquities of our property market. But think of what fairer taxes would deliver. House prices have risen so much partly because all the increment accrues to the owner. Were the state to harvest a significant part of this unearned income, it would hold prices down and dampen speculative booms. A land value tax would penalise the owners of empty homes: the resulting rise in supply would also help to suppress prices. The money the state recouped could be used to build affordable housing.

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13 months of falling prices. What does that mean again?

Discounts Drive British Retail To 13th Month Of Deflation (Guardian)

Discounts on clothing and bank holiday offers on DIY and gardening products resulted in prices in British shops continuing to fall last month, according to the British Retail Consortium. With prices across stores falling 1.4% on the year, it was the 13th straight month of deflation, the trade association said. It was, as usual, non-food items that drove the deflation, with their prices falling for a 14th month running. There was some let-up on food too, where inflation held at 0.7%, the lowest on record for the BRC-Nielsen Shop Price Index. “Food inflation is still low, many supermarkets are price-cutting and non-food prices remain deflationary, so the high street continues to generate little inflationary pressure,” said Mike Watkins, head of retailer and business insight at Nielsen.

“Little in the way of immediate seasonal or weather-related price increases is anticipated, so the outlook for the next three months is for relatively stable shop price inflation.” The latest news of benign price pressures on the high street will bring reassurance to Bank of England policymakers as they meet this week to debate how much longer they can leave interest rates at their record low of 0.5%. City economists do not expect any action at this meeting of the monetary policy committee, but some predict an interest rate rise before the end of the year. The latest official data showed consumer price inflation came in at 1.8% in April. That was up from 1.6% the month before, but was still below the Bank’s 2% target.

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Well, they can blame Lidl and Aldi for now.

UK Supermarket Chain Tesco Reports Steep Fall in Sales (CNBC)

U.K. supermarket chain Tesco on Wednesday reported a sharp fall in first-quarter sales, hurt by price cuts and subdued consumer spending. First quarter same-store sales, excluding fuel, fell 3.7%. In a news release, Tesco, which is the grocery market leader in Britain, described the results as “in line with last year’s exit rate, despite the significant reduction in untargeted promotions and deflationary impact of investment in lower prices.” Industry price cuts have driven lower growth in recent months for the U.K. “big four” supermarkets—Tesco, Asda, Sainsbury’s and Morrisons. The latest supermarket share figures from Kantar Worldpanel, published on Tuesday for the 12 weeks ending May 25, 2014, show a slowdown in grocery market growth to 1.7%—the lowest level for at least 11 years.

“To date, it is unclear whether these price cuts are part of normal industry price investment or something more material and the fact that the food commodity price index supports lower food inflation has not helped clarify the issue,” Deutsche Bank analysts said in a report on Tuesday. Tesco Chief Executive Philip Clarke said on Wednesday that Tesco sales had been hit by the supermarket’s own price cuts. He warned investors in a news call not to count on sales improvements in the next few quarters. “Since February, we have cut prices on the products that matter most, cut home delivery charges and made Grocery Click & Collect free,” Clarke said in the news release. “As expected, the acceleration of our plans is impacting our near-term sales performance. The first quarter has also seen a continuation of the challenging consumer trends in the U.K., reflecting still subdued levels of spending in addition to the more structural changes taking place across the retail industry.”

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What a mess Britain is.

RBS Clamps Down On Large Mortgages As Property Bubble Fears Grow (Guardian)

Royal Bank of Scotland has become the second major lender to clamp down on large mortgages, announcing it will restrict lending on loans above £500,000 as fears grow that the London property market is entering bubble territory. The move came as figures from Nationwide building society showed UK house prices hit a new peak in May – breaking the previous high reached before the financial crisis – to hit an average of £186,512. The announcement by the state-backed RBS, which accounts for one in 10 of all UK mortgages, follows a similar decision by the industry leader, Lloyds Banking Group, which is also part-owned by the taxpayer. Like Lloyds, RBS will limit mortgages under its RBS and Natwest brands to four times the applicant’s income if more than £500,000 is being borrowed.

It will also restrict these loans to a maximum 30-year term, in order to prevent borrowers taking out larger mortgages by spreading out repayment over a longer period.A spokesperson for RBS said: “We are focused on looking after the interests of our customers and ensuring that they only take on mortgage lending that they can afford.” The move is likely to increase pressure on other lenders to follow suit so they do not become overexposed to the London property market, where prices have increased by 17% during the past year. According to the Office for National Statistics, the average house price in the capital is £459,000. Andrew Montlake, director at Coreco Mortgage Brokers, said: “There seems to be no coincidence that the two partly state owned banks are the first ones to act in this manner.”

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Denial is easier.

Tories Dismiss EU Advice To Cool UK Housing Market (Guardian)

Senior Conservatives have dismissed advice from European officials that the UK needs to rein back its booming property market, saying George Osborne does not require help from Brussels to help run the economy. Boris Johnson, the London mayor, told Brussels officials “to take a running jump” while Chris Grayling, the justice secretary, rejected the European Commission analysis suggesting the UK should limit the Help to Buy scheme, build more houses and reform property taxes. Speaking on the byelection trail in Newark, he said the EU’s executive body was welcome to offer its view but it “doesn’t mean we’re going to change what we do”. Johnson told London’s Evening Standard: “The eurocrats should take a running jump into the ornamental pond of the Square Marie-Louise [in Brussels].” He added: “A tax on higher-value properties in London would have a detrimental effect on Londoners who are cash-poor but live in appreciating assets. They should butt out.”

The commission rushed out a clarification on Tuesday, saying that its paper did not represent a diktat, before insisting nonetheless that “there is a limit to how much fiscal consolidation can be achieved through spending cuts alone”. The commission warned in its 2014 economic policy proposals for the UK, published on Monday, that more must be done to stop a housing bubble. It said the government should consider changes to Help to Buy to help cool the housing market, along with reforms to the council tax system because it imposes relatively higher taxes on low-value homes. Asked about the intervention, Grayling said: “We’ve got a strategy we think is working in the UK as the fastest-growing economy in western Europe. I don’t think the chancellor needs help from other people to get our economy right. Europe has still got a number of deep-rooted problems … which should be a priority for those people.”

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Nothing at all is being done about the youth jobless problem.

Europe Remains A Jobless Swamp, Despite The Spanish ‘Miracle’ (AEP)

Congratulations to Spain. King Phillip VI will take over a country that created 198,000 jobs in April, the best single month since the glory days of the property boom in 2005. There is a very long way to go. The jobless rate is still 25.1%, rising to 53.5% for youth. Yet if this jobs miracle continues for a few more months it will be one of the great turnaround stories of modern times. (I am assuming that the data is true, a necessary caveat given the stream of articles recently in Le Confidencial accusing the government of cooking figures). Unfortunately, the apparent recovery in jobs in the rest of southern Europe and Holland is largely a mirage, while in Finland it is getting steadily worse. Pan-EMU unemployment fell to 11.7% in April but that is largely because workers are still dropping out of the workforce or fleeing as EMU refugees to reflationary economies.

Italy lost 68,000 jobs in April, according to the country’s data agency ISTAT. The total employed fell to 22,295,000. Italian unemployment rose to 13.6%. For youth it has climbed to a modern-era high of 43.3%, implying very serious damage to Italy’s long-term economic dynamism due to labour hysteresis. The employment rate dropped to 55.2%. Ageing workers are giving up the search for jobs – chiefly in the Mezzogiorno – and returning to their patches of land in impoverished early retirement. Yet all this was recorded as stabilisation in the Italian part of the Eurostat’s release today. You might conclude that the country was starting to claw its way out the crisis. In fact it remains trapped in a hopeless situation inside EMU, with an exchange rate overvalued by 20% to 30% against Germany. France saw a rise in its key jobless gauge by 14,800 in April. INSEE says the number who want to work but are not included in the jobless figures has jumped to 1.3m. This is known as the “unemployment halo”

Read more …

Take Weber with a pinch of – political – salt.

Prepare For The Tremors As Europe And America Drift Apart (Axel Weber/FT)

When the governing council of the European Central Bank meets in Frankfurt on Thursday, it is widely expected to announce a loosening in policy, most likely a cut in both the refinancing and deposit rates. Two weeks later, the US Federal Reserve will probably respond to strengthening economic data by moving in the opposite direction, tapering the pace of quantitative easing for the fifth consecutive meeting. This is another sign of how monetary policy is diverging in the two largest economies, a trend that is set to shape funding markets for years to come. In the US, output is set to rebound in the second quarter after having been disrupted by dismal weather in the first. And while price rises have been subdued so far, employment surveys suggest an emerging skills shortage and thus the potential for wage cost growth that could help lift inflation close to the Fed’s 2% target.

By any measure the labour market is tighter in America than in Europe, where the recovery remains weak and uneven despite buoyant financial markets. The gap between actual and potential output will barely shrink in the eurozone this year, and unemployment will remain close to a record high. Before long, these divergent fortunes are bound to lead to large differences in policy. In the US, interest rates could begin to rise in 2015. In Europe, they are likely to stay low for much longer. One might expect that movements in financial markets would reflect these expectations. [..] To my mind, investors should prepare for more volatility this year. The degree of easing of US monetary policy has been exceptional. The tightening, when it begins, will also be unprecedented. The tightening has not yet begun – the Fed’s balance sheet is still expanding. I see significant potential for volatility and setbacks on financial markets over the next few quarters.

In particular, the story is not over for emerging-market countries that rely on cheap dollar funding. The recovery of their stock markets and currencies in the past months does not reflect improved economic fundamentals, but a better mood among investors. These countries are still vulnerable. When US interest rates begin to rise, these borrowers may be able to turn to euro-denominated debt as an alternative source of cheap financing. However, this at best delays adjustment; improving fundamentals remains urgent. The Fed’s balance sheet, which was about half the size of the Eurosystem’s going into the crisis, has now overtaken its European counterpart as a proportion of output. Emerging markets will not be the only ones to suffer when this trend goes into reverse. A tightening in US monetary policy always causes fallout. This time will be no different. In fact, it may be worse, since the tightening starts from extremely expansionary territory.

Read more …


Japan Base Wages Decline 23 Months In A Row (Zero Hedge)

Proving once again that you can’t print your way to general economic prosperity, Abenomics took another shot to the chest last night as Japan’s base wages failed to rise month-over-month for the 24th month in a row (the longest streak in history). Even after all the promises and hope of the spring wage negotiations, Abe’s ‘plan’ to guilt employers into raising wages is not working; which is especialy problematic given the surge in inflation (as the ‘real’ wage slumped 3.1% in April) As Goldman warns, we caution against excessive expectations for sustained wage growth.

Via Goldman Sachs: “Basic wages still falling even after spring wage negotiations; total wages lifted by special wages/overtime: April total cash wages rose 0.9% yoy, accelerating from March (+0.7%). Special wages increased 20.5% yoy (March: +10.3%), pushing up the total by 0.6 pp. Overtime pay has underpinned wages as a whole recently but is beginning to peak out, although it still rose 5.1% in April (March: +5.8%) and contributed +0.4pp to overall wage growth. Meanwhile, basic wages (80% of the total) remained on a yoy downtrend (April: -0.2%; March: -0.3%). While wage hikes resulting from the spring negotiations (shunto) will be largely reflected in basic wages, the April figure indicates no major change in basic wages since the start of the new fiscal year. Next month’s May data should shed more light, as many companies will include the shunto wage hike portion in salaries from May.”

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Oz has become China’s bitch.

Is Trouble In Store For The Australian Economy? (CNBC)

Australia’s economy appears to be slowing and some economists argue that a more subdued outlook could lead to further monetary easing from the country’s central bank. Australia is due to report first quarter economic growth on Wednesday. While economists polled by Reuters expect robust growth of 3.2% on-year, up from 2.8% in the previous quarter, and 0.9% on-quarter, a marginal increase on 0.8% last quarter, analysts say the economy will take a turn for the worse in the second quarter. “I think the second quarter is where we’ll see a huge disturbance as there’s been a huge change or shift back in [Australia] that will certainly affect that number,” said Evan Lucas, market strategist at IG. “All of a sudden come April things weren’t as rosy coming out of China, people were talking about the budget which was perceived as being quite tough – and as taking 0.3% of GDP out of the economy according to most economists. All of that stuff is going to filter through,” he said.

Lucas expects second quarter growth to slow to 0.4% on-quarter from 0.7-0.8% in the first quarter and sees this pull back prompting the Reserve Bank of Australia (RBA) to take a more dovish stance. “The effects of the budget, the slowdown they’ve finally seen in housing prices, the real under-performance in commodity prices and the consequential effect on the mining space may finally see their neutral status going back to slightly dovish,” he added. Other economists shared this view. Analysts at Goldman Sachs also expect a more dovish tone from the RBA ahead of Tuesday’s policy meeting due to a number of factors. “Commodity prices have fallen sharply, global growth faltered somewhat in early 2014, inflation printed relatively benignly and business and consumer surveys moved lower. In response the RBA incrementally has sounded more dovish,” Goldman analysts said in a note.

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Nice twist.

Singapore Joins China With Dangerous Debt Level (Bloomberg)

Singapore companies’ indebtedness has swelled to the most in Asia after China and India as the city-state’s economic growth slows, according to GMT Research Ltd. Leverage among the Southeast Asian nation’s corporates is following counterparts in the two larger economies to a level considered a “danger threshold,” Gillem Tulloch, founder of the Hong Kong-based researcher, said in an interview yesterday. Debt rose to six times the amount of operating cash flow in 2013 for non-financial Singaporean companies, from 5.1 times in 2012, a report by GMT Research shows.

“It’s a bit surprising that Singaporean companies seem to have leveraged up significantly over the past few years,” said Tulloch, 43, a former analyst at CLSA Asia-Pacific Markets. “There’s been a slight loss of discipline, or it could be that the growth has not come in as expected.” Singapore’s government said last month its export-led economy will experience “modest” expansion in 2014 amid a labor-market crunch. It’s likely that growth is headed for a slowdown, since it can’t be sustained without more stimulus or reckless bank lending, GMT Research said. The leverage ratio in China rose to 7.5 times from 6.8 times last year, while the measure in India grew to 8.1 times from 7 times, the May 28 report showed.

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HA! Where is ”the world” going to get that kind of dough? Borrow from each other?

World Needs to Invest $50 Trillion to Meet Its Energy Needs: IEA (IB Times)

Tens of trillions of dollars in global energy investments will have to be made over the next two decades in order to ensure that the world has enough energy supplies, according to the International Energy Agency, an intergovernmental organization based in Paris. In a special report released Monday, the agency said that nearly $50 trillion of cumulative investment is needed through 2035. More than half of that amount will be spent on extracting, transporting and refining fossil fuels like oil and natural gas. Another $8 trillion is needed to invest in energy efficiency. Upgrades in the electricity sector, including replacing aging power plants and installing new infrastructure, could require $16.4 trillion in investments. Europe alone needs to spend $2 trillion over the years to develop its power industry and fix its broken energy markets, or else risk major blackouts in the coming years, CNN noted.

The IEA stressed the need for oil-producing countries like Saudi Arabia to ramp up investment in new sources of fuel supplies. Although the surge in North American oil and gas production from shale rock has reduced the leverage of Middle East producers in recent years, the shale boom will likely “run out of steam in the 2020s.” If total supplies don’t recover, world oil markets will be tighter and more volatile and oil prices could rise by $15 a barrel in 2025, the report said, according to Platts in London. “Many of our hopes and our worries about the future of the global energy system boil down to questions about investment,” Maria van der Hoeven, the IEA’s executive director, said at the report’s launch.

“Will policies and market conditions create enough investment opportunities in the regions and sectors where they are needed? … And will policymakers succeed in steering investments toward a cleaner, more secure energy system—or are we locking in technologies and patterns of consumption that store up trouble in the future?” Global energy investments totaled more than $1.6 trillion in 2013, a figure that has more than doubled in real terms since 2000, Platts said. According to the IEA, the investment needed every year to supply the world’s energy needs rises steadily towards $2 trillion over the period to 2035.

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The EU is doomed because of this feature. Why would anyone want to be part of it if it only takes away self determination, and charges a price for that too?

The Democracy Deficit: Europeans Vote, Merkel Decides (Spiegel)

Before the European Parliament election last month, voters were told the poll would also determine the next Commission president. In a silent putsch against the electorate, German Chancellor Angela Merkel is now impeding the process. She fears a loss of power and Britain’s EU exit. Merkel had hardly begun her speech last Friday before she got right to the point. With her hands set on the podium in front of her in the Regensburg University auditorium, she said: “I am engaging in all discussions in the spirit that Jean-Claude Juncker should become president of the European Commission.” German news agency DPA immediately sent out a headline reading: “Merkel: Juncker To Be EU Commission President.” And yet, if that is what she really wanted, it’s a goal she could have achieved as early as last Tuesday. Instead, she opted against it. One can, of course, choose to believe the words Merkel delivered last Friday in Regensburg. Or one can focus more on her actions.

Thus far, her actions have spoken a different language. It is the language of one for whom the voters are secondary. The European Union election at the end of May has led to an unprecedented power struggle between the European Parliament and the European Council, made up of the 28 EU heads of state and government. It is a vote that could change the EU more than any past European election. The next several weeks will determine just how democratic the EU wants to be, whether the balance of power in Brussels will have to be readjusted and whether Merkel is really the leader of Europe. With European Social Democrats set to play a key role in the EU struggle, the immediate future could also determine the stability of Merkel’s own governing coalition in Berlin, which pairs her conservatives with the SPD. Should the European Parliament get its way in naming the next European Commission president, it would mark a significant shift of power away from EU leaders, and they likely wouldn’t get it back. It is a development that would make the European Union more democratic and more like a nation-state. But that is exactly what Britain wants to avoid, and any such development could drive the country out of the EU.

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Must read.

The Minsky Moment Meme (Ben Hunt)

Today you can’t go 10 minutes without tripping over an investment manager using the phrase “Minsky Moment” as shorthand for some Emperor’s New Clothes event, where all of a sudden we come to our senses and realize that the Emperor is naked, central bankers don’t rule the world, and financial assets have been artificially inflated by monetary policy largesse. Please. That’s not how it works. That’s not how any of this works. Just to be clear, I am a huge fan of Minsky. I believe in his financial instability hypothesis. I cut my teeth in graduate school on authors like Charles Kindleberger, who incorporated Minsky’s work and communicated it far better than Minsky ever did. Today I read everything that Paul McCulley and John Mauldin and Jeremy Grantham write, because (among other qualities) they similarly incorporate and communicate Minsky’s ideas in really smart ways.

But I’m also a huge fan of calling things by their proper names, and “Minsky Moment” is being bandied about so willy-nilly these days as a name for so many different things that it greatly diminishes the very real value of Minsky’s insights. So here’s the Classics Comic Book version of Minsky’s financial instability hypothesis. Speculative private debt bubbles develop as part and parcel of a business/credit cycle. This is driven by innate human greed (or as McCulley puts it, humans are naturally “pro-cyclical”), and tends to be exacerbated by deregulation or laissez-faire government policy. Ultimately the debt burdens created during these periods of market euphoria cannot by met by the cash flows of the stuff that the borrowers bought with their debt, which causes the banks and shadow banks to withdraw credit in a spasm of sudden fear.

Because there’s no more credit to be had for more buying and everyone is levered to the hilt anyway, stuff either has to be sold at fire-sale prices or debts must be defaulted, either of which just makes the banks withdraw credit even more fiercely. The Minsky Moment is this spasm of private credit contraction and the forced sale of even non-speculative assets into the abyss of a falling market. Here’s the kicker. Minsky believed that central banks were the solution to financial instability, not the cause. Minsky was very much in favor of an aggressively accommodationist Fed, a buyer of last resort that would step in to flood the markets with credit and liquidity when private banks wigged out. In Minsky’s theory, you don’t get financial instability from the Fed massively expanding its balance sheet, you get financial stability. Now can this monetary policy backstop create the conditions for the next binge in speculative private debt? Absolutely. In fact, it’s almost guaranteed to set up the next bubble.

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May 232014
 May 23, 2014  Posted by at 7:46 pm Finance Tagged with: , ,  2 Responses »

Arthur Rothstein Mooo, Ropesville Farms, Texas April 1936

We’re going into another weekend, and this one’s Memorial. It may also be memorable, since there are elections in both the EU and Ukraine. And fireworks may well be part of both, during and after. In the Netherlands, where they were early, just 35% of people voted, which makes you want to look up the word democracy in the thesaurus, while in also-early-ran Britain UKIP won big. Nobody cares about Europe, or let’s say the only ones who care do so for strictly personal reasons, not for some grand ideal. The ideal is dead, the only thing left is “the EU gives us jobs and profits”, even as both claims are entirely unprovable for lack of things to compare them to. The Ukraine elections are a whole lot more serious. Willy Wonka is set to be the next president, but only part of the population will accept him, and the rest have plenty guns to prove they don’t.

The chance that Ukraine survives as a nation is about the same as the global economy, or the US economy, being in recovery. Slim in a late phase anorexic sense. New home sales were announced up. But are they?

New Home Sales Post Tepid April Bounce As Average, Median Home Price Drops

Last month’s dramatic miss of expectations for a modest post-weather pop in new home sales (having dropped 14.5% month-over-month) so it was inevitable that there would be a bounce. Modestly beating expectations, 433k annualized new home sales in April was only a 6.4% gain MoM thanks to the upward revision of the big miss in March. This ‘recovery’ remains well below the peak see in January – right in the middle of the worst weather impacted time in US history if one is to believe what the media is spewing. Before the ‘housing recovery is back on track’ meme gets going though, there is the fact that homes sold in the Northeast fell to the lowest since June 2012 … as the average home price fell to $320,100 – the lowest since August 2013.

A scratch below the surface shows that the April jump was all region, and driven by the Mideast where New Homes sold were up a whopping 47.4% (35.5% Y/Y) in April to 84K. Contrast that with the Northeast which was down -26.7% (-31.3% Y/Y) to 22K. And perhaps the most interesting fact: both the median and average home prices were down Y/Y, by 1.3% and 5.0% respectively. Further, the average new home price of $320,100 was the lowest since August 2013.

Some of the big boys think not:

Big Investors Are Betting Against US Housing Market (MarketWatch)

• DoubleLine Capital founder Jeffrey Gundlach took to the podium at a highly watched investment conference to suggest shorting the popular SPDR S&P Homebuilders exchange traded fund . He pointed to a concern, cited by others, that would-be young buyers are shunning mortgages . BlackRock CEO Laurence Fink said Tuesday that the housing market is “ structurally more unsound ” …

• Real-estate investor Sam Zell says he expects the Homeownership rate to drop as low as 55% as more people delay marriages.

• Charles Plosser, president of the Fed Bank of Philadelphia says housing fundamentals “remain sound” on Tuesday, while New York Fed Bank President Charles Dudley said later that day he believes there’s a “deep and protracted” housing downturn.

According to Jeff Cox at CNBC, the Fed is awfully bad in its history of predictions:

Everything The Fed Thinks It Knows May Be Wrong (CNBC)

At the core of the Federal Reserve’s credibility is its insistence that it can hold interest rates low enough for long enough to ensure a complete economic recovery. The reality may prove quite a bit different, particularly if current trends hold up. Those low yields are critical for both the public and private sector – financing upwards of a trillion dollars a year in corporate borrowing as well as helping to contain financing costs for the government’s $17.5 trillion debt. …

“It’s not that I don’t have faith in the Fed or think these are not some of the smartest economists out there. This is unprecedented territory,” said Lindsey M. Piegza, chief economist at Sterne Agee. “It’s going to be very difficult to understand those unintended consequences on the back end of these policies. …That confusion of how to unwind these unprecedented policies says to me there’s going to be a lot of volatility, a lot of missteps.”

It’s the rates, guys, they’ll make you poor(er) and save the economy at the same time, so your kids may not have to be chained down for their entire lives. See, in the end it all works out.

Anyone else have the feeling that there are at least as many Americans who don’t register as unemployed any longer as those that are? So, you know, the real number should be north of 12%? Look, if Italy can include hookers and cocaine to boost its GDP numbers, why would you think Washington would not? Cause their nice and decent folk looking out for you? Come to think of it, what part of US GDP is blow and pussy? However that may be:

Nearly Half Of US Unemployed Have Given Up Looking For A Job

Nearly half of unemployed Americans are on the verge of completely giving up on looking for a job, but they remain optimistic they will find a job they really want within the next six months, a new survey found. The poll, commissioned by staffing firm Express Employment Professionals, found that 47% of the 1,500 respondents agreed to some extent that they have completely given up on looking for a job, but only 7% said they agree completely with that statement. “

And why is this all going to get worse? Again, it’s the rates, guys:

Forget ‘Taper Tantrum’, Here Comes ‘Rate Rage’

If you thought market nervousness over central bank policy decisions was largely over, you might be in for a shock. Despite global markets seemingly taking the Federal Reserve’s “tapering” in their stride it now appears there’s a new concern on the horizon. “Rate rage”, dubbed on Friday by Dario Perkins, an economist at Lombard Street Research, is a term used to describe the future market turmoil that could arise from the raising of benchmark interest rates by the Bank of England and the Federal Reserve. … “With central banks less able to provide clear guidance about the future, we are likely to see renewed market volatility as they start to raise interest rates in 2015. Some investors will again be anxious to sell their bonds, fearing significantly higher yields.”

And those rising rates will need to lead to what Marc Faber mistakenly labels asset deflation, which exists no more than cookie inflation, consumer inflation or any of those terms. What Faber has right is that a lot of money/credit, trillions ‘worth’ of it, will go Poof and will never be seen again. And that will have a major effect on the economy and everyone who’s part of it.

Marc Faber: ‘Brace For A “General Asset Deflation’

With global debts 30% higher than they were at the 2007 crisis peaks, enabled by the money printing of central banks, Marc Faber warns that the “asset inflation” of the last years is not reflective of the broad growth seen in the 70s. “The system is still very vulnerable,” he warned as investors are exuberant over “hot new issues” just as they were in 2000 and fears “excessive speculation” means investors should brace for a “general asset deflation.”

But we can still grow our way out of all the negatives, can’t we? You know, escape velocity! Well, sorry …

a target=”new” href=””>World Trade Flows Drop In Q1 2014

World trade flows fell in the first three months of 2014, another indication that a sustained and broad-based pickup in global economic growth remains out of reach more than five years after the start of the financial crisis. The Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Friday said the volume of world exports and imports in March was 0.5% lower than in February. For the first quarter as a whole, trade flows were down 0.8% on a quarterly basis, after a rise of 1.5% in the final three months of last year.

That’s not happening. Maybe there’s a pocket somewhere, China?

PBOC’s Zhou Says China May Have Housing Bubble in ‘Some Cities’ (Bloomberg)

China may have a housing bubble only in “some cities” … While 12 of 18 economists say China has some national oversupply of housing, only seven say the market is in a bubble countrywide, according to a Bloomberg News survey [..] Half see bubbles in some cities, and a majority say they expect restrictions on home purchases and loans to be loosened at a regional level. New construction in China has fallen 22% and sales have slumped 7.8% this year,

No salvation there either. We’re going into the Memorial weekend, and the elections that may tear the EU further apart and do g-d knows what damage in Ukraine, with an economic system that keeps on exhibiting sings of starvation and exhaustion more than recovery (for good reason, when you look at debt levels).

Things are not going well. At all. Perhaps, instead of clinging on to happy happy propaganda emanating from the politicians who screwed up and the media that are umbilically linked to them, it would be better if we acknowledge the failures of our economic and political systems, in order to be able to build new ones. What we have now is only going to schlepp us down ever more. Not unlike Ukraine perhaps.

Here’s your weekend song.

Big Investors Are Betting Against US Housing Market (MarketWatch)

Some of Wall Street’s most vocal investors are betting against housing, saying the recovery has fizzled out. Earlier this month, DoubleLine Capital founder Jeffrey Gundlach took to the podium at a highly watched investment conference to suggest shorting the popular SPDR S&P Homebuilders exchange traded fund . He pointed to a concern, cited by others, that would-be young buyers are shunning mortgages . BlackRock CEO Laurence Fink said Tuesday that the housing market is “ structurally more unsound ” than prior to the financial crisis due to its reliance on Fannie Mae and Freddie Mac , according to news reports. He did sound a more optimistic note on Homeownership reviving.

Real-estate investor Sam Zell says he expects the Homeownership rate to drop as low as 55% as more people delay marriages. But there are also some long bets out there. Former Legg Mason Chief Bill Miller, a housing bull, said last week that the bearish positions of Gundlach and Zell are wrong . He expects continued strong demand for housing, and said he’s betting on mortgage insurers, home builders and subprime servicers, according to Bloomberg News. And Pershing Square Capital Management’s Bill Ackman recently trotted out a 110-slide presentation on the value of mortgage finance giants Fannie Mae and Freddie Mac, saying he’s ready to sit down with the government to work out a deal.

As investors take sides, Federal Reserve officials are doing so too . Charles Plosser, president of the Fed Bank of Philadelphia says housing fundamentals “remain sound” on Tuesday, while New York Fed Bank President Charles Dudley said later that day he believes there’s a “deep and protracted” housing downturn. For market participants, the current time period reflects uncertainty — and a touch of fear — about whether the housing market is improving fast enough to push broader U.S. economic growth toward liftoff. Investors are taking the pulse of business conditions after a cold winter to gauge when and how the Fed will normalize its monetary policies, in turn guiding the future of the five-year-old bull market in stocks and the direction of bond yields. That’s making housing a key factor that could aid or stifle growth.

Read more …

Everything The Fed Thinks It Knows May Be Wrong (CNBC)

At the core of the Federal Reserve’s credibility is its insistence that it can hold interest rates low enough for long enough to ensure a complete economic recovery. The reality may prove quite a bit different, particularly if current trends hold up. Those low yields are critical for both the public and private sector – financing upwards of a trillion dollars a year in corporate borrowing as well as helping to contain financing costs for the government’s $17.5 trillion debt. But after nearly five months of a decline in yields that caught market participants almost completely off guard, talk is increasing that inflationary pressures are building and that yields may begin to rise in a way that could put the Fed behind the curve of market forces.

That could help undermine the position of a central bank that badly needs the market’s confidence if it is to have any chance to unwind a nearly $4.4 trillion balance sheet and a historically lengthy time period of basement-level interest rates. “It’s not that I don’t have faith in the Fed or think these are not some of the smartest economists out there. This is unprecedented territory,” said Lindsey M. Piegza, chief economist at Sterne Agee. “It’s going to be very difficult to understand those unintended consequences on the back end of these policies. …That confusion of how to unwind these unprecedented policies says to me there’s going to be a lot of volatility, a lot of missteps.” Others in the market share the sentiment that while the Fed may not be driving blind, it doesn’t have a particularly clear road map, either. One worry is that a combined heat-up in the economy will combine with inflation to force the Fed to raise rates before it would like.

Read more …

Forget ‘Taper Tantrum’, Here Comes ‘Rate Rage’ (CNBC)

If you thought market nervousness over central bank policy decisions was largely over, you might be in for a shock. Despite global markets seemingly taking the Federal Reserve’s “tapering” in their stride it now appears there’s a new concern on the horizon. “Rate rage”, dubbed on Friday by Dario Perkins, an economist at independent U.K.-based research firm Lombard Street Research, is a term used to describe the future market turmoil that could arise from the raising of benchmark interest rates by the Bank of England and the Federal Reserve.

“Just as markets suffered a ‘taper tantrum in 2013’, a ‘rate rage’ is possible,” he said in the research note. “With central banks less able to provide clear guidance about the future, we are likely to see renewed market volatility as they start to raise interest rates in 2015. Some investors will again be anxious to sell their bonds, fearing significantly higher yields.” On May 22, 2013, the Federal Reserve’s policy minutes sparked fears the central bank could start tapering off its $85 billion-a-month bond purchasing program. This came to be known as the “taper tantrum”, with emerging market (EM) currencies tumbling as investors started to bring their dollars back to the U.S. in anticipation of higher interest rates.

Read more …

Marc Faber: ‘Brace For A “General Asset Deflation’ (Zero Hedge)

With global debts 30% higher than they were at the 2007 crisis peaks, enabled by the money printing of central banks, Marc Faber warns that the “asset inflation” of the last years is not reflective of the broad growth seen in the 70s. “The system is still very vulnerable,” he warned as investors are exuberant over “hot new issues” just as they were in 2000 and fears “excessive speculation” means investors should brace for a “general asset deflation.”

Emerging markets are relatively cheap to the US and Europe, he notes, but it is too early; there is nothing to like about low treasury yields but they are good to offset risk. As the market soared recently, fewer and fewer stocks are making new highs and this internal weakness (lack of breadth) and the breakdown in so many ‘loved’ stocks says the drop is coming sooner rather than later…

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World Trade Flows Drop In Q1 2014 (WSJ)

World trade flows fell in the first three months of 2014, another indication that a sustained and broad-based pickup in global economic growth remains out of reach more than five years after the start of the financial crisis. The Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Friday said the volume of world exports and imports in March was 0.5% lower than in February. For the first quarter as a whole, trade flows were down 0.8% on a quarterly basis, after a rise of 1.5% in the final three months of last year. Each month, the CPB aggregates measures of imports and exports for 96 countries around the world, plus sub-Saharan Africa. It provides the most up-to-date measure of trade flows available, which has a close correlation with global economic growth.

During the first quarter, exports from developing economies in Asia recorded the largest decline, a drop of 4.5%. Central and Eastern Europe was the only region to record a rise in exports. Asian developing economies also recorded the largest drop in imports, while Japan recorded what the CPB termed “a remarkable increase,” or a jump of 4.5%. That was likely linked to high levels of consumer spending ahead of an April increase in the country’s sales tax, which also boosted economic growth during the period. According to the CPB, exports from and imports to the U.S. also fell during the quarter, while trade flows to and from the euro zone were little changed. The decline in trade flows is consistent with other evidence that suggests the global economy got off to a weak start this year.

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PBOC’s Zhou Says China May Have Housing Bubble in ‘Some Cities’ (Bloomberg)

China may have a housing bubble only in “some cities,” a issue that’s difficult to resolve with a single nationwide policy, the nation’s central bank Governor Zhou Xiaochuan said. China is a big country with multiple housing markets, many of which are still drawing new inhabitants from the countryside, Zhou said yesterday in an interview in Kigali, Rwanda, where he was attending the African Development Bank’s annual meeting. “China is still in the process of urbanization, so there may be some kind of volatility in the supply-demand relationship,” Zhou said. “But if you look at the medium-term of urbanization, I think we still have a very good market for home sectors.”

While 12 of 18 economists say China has some national oversupply of housing, only seven say the market is in a bubble countrywide, according to a Bloomberg News survey conducted from May 15 to May 20. Half see bubbles in some cities, and a majority say they expect restrictions on home purchases and loans to be loosened at a regional level. New construction in China has fallen 22% and sales have slumped 7.8% this year, testing the government’s four-year commitment to curbs that aim to make homes more affordable, and its reluctance to enact broader economic stimulus. The slowdown’s depth will have implications for everything from demand for Australian iron ore to land sales that help local governments repay their $3 trillion of debt.

Read more …

A Look Inside The Real Fed Balance Sheet (Zero Hedge)

Sometimes one just needs a little translation to see the big picture for the trees…

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Toxic Reputations Are A Time Bomb For Banks (CNBC)

More than five years after the 2008 economic crisis, banks still have an awful reputation. And the hits keeps coming with this this week’s announcement from Credit Suisse that it’s pleading guilty to helping Americans evade taxes. In fact, Attorney General Eric Holder recently said that no bank is “too big to jail,” as his Justice Department pursues criminal charges against a number of financial institutions. Does it really matter? You could be forgiven for thinking it doesn’t. After all, a historically bad reputation hasn’t stopped banks from delivering historically good returns. Bank profits reached an all-time high in 2013 and large U.S. bank stocks have outperformed the S&P 500 for two years running for the first time since 2003.

If a half-decade of public outrage and Occupy Wall Street isn’t enough of a reputational blow to knock banks off their stride, it’s fair to wonder what is. But the toxic reputation of banks is still a huge problem — a time bomb that could soon extract a significant toll on their bottom lines. It may seem an odd argument to make at a time when banks are so profitable and influential. But though banks have won a few short-term battles in Washington, they’re losing the long-term war for public opinion. Public confidence in banks has marginally improved but is still well below pre-recession levels, and the consequences are showing up in the broader political and regulatory debate. Last year, a bipartisan group of senators introduced a bill that would have effectively reinstated the Glass-Steagall regulations that separated commercial and investment-banking activities.

And as jockeying for the 2016 presidential race starts, commentators have noted a rising populism on both the left and right, with Republican contender Rand Paul recently saying that the GOP “cannot be the party of fat cats, rich people and Wall Street.” This may all amount to nothing. But it’s instructive to remember that Congress passed two major batches of financial regulation in response to the Great Depression, one in 1933-1934 and another in 1940. There’s no reason Congress couldn’t revisit or expand upon the Dodd-Frank legislation in the coming years. If they do, the prevailing public opinion of banks will help determine if any legislation is constructive or punitive for the industry. Even without new legislation, public opinion will undoubtedly influence the aggressiveness of regulatory bodies like the Consumer Financial Protection Bureau.

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Nearly Half Of US Unemployed Have Given Up Looking For A Job (RT)

Nearly half of unemployed Americans are on the verge of completely giving up on looking for a job, but they remain optimistic they will find a job they really want within the next six months, a new survey found. The poll, commissioned by staffing firm Express Employment Professionals, found that 47% of the 1,500 respondents agreed to some extent that they have completely given up on looking for a job, but only 7% said they agree completely with that statement. “The study offers several surprising and sometimes troubling insights into how unemployed Americans are faring and what they’re doing, and not doing, to get jobs,” Bob Funk, CEO of Express and a former Chairman of the Federal Reserve Bank of Kansas City, said in a statement. “It also demonstrates why the labor force participation rate is so low – many people have given up looking for a job.”

Over the past 12 months, the number of long-term unemployed (those unemployed for 27 weeks or more) has decreased by 908,000, according to the Bureau of Labor Statistics. The civilian labor force dropped by 806,000 in April, following an increase of 503,000 in March. The labor force participation rate fell by 0.4 percentage point to 62.8% in April. The jobless rate nationwide dropped to 6.3% last month — the lowest level since 2008 — as the nation added 288,000 jobs, according to the government. “Though the unemployment rate fell in March and April, both drops reflected fewer people looking for work, not more employment,” Nigel Gault, chief U.S. economist for the forecasting firm IHS Global Insight, said in a written assessment of the job market, according to NPR. “After searching for four years and being unsuccessful, I am tired of trying,” said one Express survey respondent.

But many jobless Americans are reluctant to make significant changes to boost their chances of landing a job. Only 13% of the survey’s respondents have actively pursued more education. And they are unwilling to relocate: 44% of respondents said they are unwilling to relocate to a new town, while 60% said are unwilling to move to a new state. These numbers include 57% and 72%, respectively, of those unemployed two years or longer.

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Bad Worse Worstest.

New Jersey Economic Comeback? Fuhgeddaboudit! (Reuters)

When New Jersey Governor Chris Christie on Tuesday unveiled a massive budget shortfall, he pointed the finger at a steep and unexpected drop in income taxes. But Christie’s lowered revenue projections – $2.75 billion through the end of fiscal 2015 – highlight a deeper problem: While its neighbors and the rest of the nation have slowly but steadily recovered from the Great Recession, New Jersey has flatlined. The data paint a bleak picture. Through March, New Jersey had recovered less than 40% of the jobs it lost during the recession, while the United States overall has recovered 99% of the jobs lost, according to data from the U.S. Labor Department.

In the high-paying manufacturing sector, for instance, nearly 650,000 new jobs have been created nationally since Christie took office in early 2010. Over that same time, New Jersey’s manufacturing employment has declined by nearly 18,000 jobs. In housing, too, New Jersey is weakening while other areas improve. In the first quarter of 2014, it was the only state to see an increase in foreclosure rates. At 8%, its foreclosure rate is now the highest in the country, according to the Mortgage Bankers Association. And while most states have begun rebuilding their reserve funds, New Jersey’s has continued to shrink and is now at its lowest level in a decade, according to Moody’s Investors Service. New Jersey’s economy grew by 2% over the 12 months through the end of April. But neighbors Pennsylvania and Delaware grew by 4.2% and 3.9%, respectively, according to a Federal Reserve Bank of Philadelphia index that combines four economic factors. The U.S. economy expanded by 3% using the same measure.

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Greenwald said the revelation would lead to deaths. Really? More than there already are since we invaded?

WikiLeaks: NSA Records ‘Nearly All’ Phone Calls In Afghanistan (RT)

The NSA records almost all domestic and international phone calls in Afghanistan, similar to what it does in the Bahamas, WikiLeaks’ Julian Assange said. Reports in the Washington Post and the Intercept had previously reported that domestic and international phone calls from two or more target states had been recorded and stored in mass as of 2013. Both publications censored the name of one victim country at the request of the US government, which the Intercept referred to as ‘Country X’. Assange says he cannot disclose how WikiLeaks confirmed the identity of the victim state for the sake of source protection, though the claim can be “independently verified” via means of “forensic scrutiny of imperfectly applied censorship on related documents released to date and correlations with other NSA programs.”

The Intercept, which Glenn Greenwald, who first broke the Edward Snowden revelations helped to found, had earlier named the Bahamas as having their mobile calls recorded and stored by a powerful National Security Agency (NSA) program called SOMALGET. WikiLeaks initially opted not to reveal the name of ‘Country X’ as they were led to believe it could “lead to deaths” by Greenwald. WikiLeaks later accused The Intercept and its parent company First Look Media of censorship, saying they would go ahead and publish the name of the NSA-targeted country. “We do not believe it is the place of media to ‘aid and abet’ a state in escaping detection and prosecution for a serious crime against a population,” Assange said in the statement. “By denying an entire population the knowledge of its own victimization, this act of censorship denies each individual in that country the opportunity to seek an effective remedy, whether in international courts, or elsewhere,” he said.

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Well, that is, there is no proof.

Pentagon: Scope Of Intelligence Compromised By Snowden ‘Staggering’ (Guardian)

The classified damage assessment was first cited in a news report published by Foreign Policy on January 9. The Foreign Policy report attributed details of the DIA assessment to House intelligence committee chairman Mike Rogers and its ranking Democrat Dutch Ruppersberger. The lawmakers said the White House had authorized them to discuss the document in order to undercut the narrative of Snowden being portrayed as a heroic whistleblower. The DIA report has been cited numerous times by Rogers and Rusppersberger and other lawmakers who claimed Snowden’s leaks have put US personnel at risk. In January, Rogers asserted that the report concluded that most of the documents Snowden took “concern vital operations of the US Army, Navy, Marine Corps and Air Force”.

“This report confirms my greatest fears — Snowden’s real acts of betrayal place America’s military men and women at greater risk. Snowden’s actions are likely to have lethal consequences for our troops in the field,” Rogers said in a statement at the time. But details to back up Rogers’ claims are not included in the declassified material released to the Guardian. Neither he nor any other lawmaker has disclosed specific details from the DIA report but they have continued to push the “damage” narrative in interviews with journalists and during appearances on Sunday talk shows.

The declassified portion of the report obtained by the Guardian says only that DIA “assesses with high confidence that the information compromise by a former NSA contractor [redacted] and will have a GRAVE impact on US national defense”. The declassified material does not state the number of documents Snowden is alleged to have taken, which Rogers and Ruppersberger have claimed, again citing the DIA’s assessment, was 1.7m. Nor does the declassified portion of the report identify Snowden by name. “[Redacted] a former NSA contractor compromised [redacted] from NSA Net and the Joint Worldwide Intelligence Communications System (JWICS),” the report says. “On 6 June 2013, media groups published the first stories based on this material, and on 9 June 2013 they identified the source as an NSA contractor who had worked in Hawaii.”

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Putin: Sanctions Will Have ‘Boomerang Effect’ (CNBC)

Russian President Vladimir Putin has criticized Western powers and the Ukrainian interim government, as he announced plans for a new Eurasian union. He argued that the current stand-off with Ukraine is “not due to Russia but to the situation in the Ukraine, which abuses its position” in a speech at the St Petersburg Economic Forum, Russia’s answer to Davos. “We have gathered here for economic discussions, but we cannot erase political discussions,” Putin said, as he slammed the use of sanctions against Russian businesses and individuals as having a “boomerang effect” on the West. “Economic sanctions as a tool of political pressure are eventually going to attack the economy of the countries who have initiated the sanctions,” he said.

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West’s Eastward Expansion Ruins Historic Chance At Unification – Lavrov (RT)

The Ukrainian crisis is a natural result of the West’s expansion of its influence eastwards at the expense of Russian interests, Foreign Minister Sergey Lavrov said. This stance ruins a historic chance for a unified continent. The turbulence in Ukraine is reminiscent of the violence and bloodshed that Europe experienced in the 20th century, Lavrov told a security conference in Moscow. “The European continent, which brought two global military catastrophes in the last century, is not demonstrating an example to the world of peaceful development and broad cooperation,” he said, adding that the situation wasn’t accidental, but rather “a natural result of the developments over the past quarter of a century.” “Our Western partners rejected a truly historic chance to build a greater Europe in favor of border lines and the habitual logic of expanding the geopolitical space under their control to the East,” Lavrov stressed.

“This is de facto a continuation of a policy of containing Russia in a softer wrapping.” The West ignored Russia’s calls for cooperation and would not pursuit a challenge of bringing together different integration projects in Eurasia. Instead it was forcing nations historically close to Russia to choose between the East and the West.“With Ukraine’s fragile political situation, this pressure was enough to trigger a massive crisis of statehood,” Lavrov pointed out. But Ukraine is just one example of the destructive results that Western foreign policies bring, Lavrov said. “The operations to change regimes in sovereign states and the foreign-orchestrated ‘color revolutions’ of different brands produce obvious damage to the international stability. The attempts to impose one’s own designs for internal reforms on other peoples, which don’t take into account national characteristics, to ‘export democracy’, impact destructively international relations and multiplies the number of flashpoints on the world map,” he continued.

“Schemes based on advocating one’s exceptionalism, the use of double standards, pursuit of unilateral geopolitical outcomes in crisis situation, are widely used not only in Europe, but also in other regions,” the minister said. “This undermines crisis mediation efforts.” The problems in Ukraine, Syria, Afghanistan and many other countries can only be solved through collective effort, and Russia stands for joining forces in tackling issues. A collective effort resulted in resent advances on the Iranian nuclear program and launched the dismantling of the Syrian chemical arsenal, Lavrov said. Meanwhile unilateral attempts to resolve the Arab-Palestinian conflict proved to be deficient.

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Anything goes.

Cocaine Sales, Hookers to Boost Italian GDP in Boon for Budget (Bloomberg)

Italy will include prostitution and illegal drug sales in the gross domestic product calculation this year, a boost for its chronically stagnant economy and Prime Minister Matteo Renzi’s effort to meet deficit targets. Drugs, prostitution and smuggling will be part of GDP as of 2014 and prior-year figures will be adjusted to reflect the change in methodology, the Istat national statistics office said today. The revision was made to comply with European Union rules, it said.

Renzi, 39, is committed to narrowing Italy’s deficit to 2.6% of GDP this year, a task that’s easier if output is boosted by portions of the underground economy that previously went uncounted. Four recessions in the last 13 years left Italy’s GDP at 1.56 trillion euros ($2.13 trillion) last year, 2% lower than in 2001 after adjusting for inflation. “Even if the impact is hard to quantify, it’s obvious it will have a positive impact on GDP,” said Giuseppe Di Taranto, economist and professor of financial history at Rome’s Luiss University. “Therefore Renzi will have a greater margin this year to spend” without breaching the deficit limit, he said.

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If God would want to stop us from destroying his creation, he would, right? Since he made us (or is that just me?) in his own image, whatever we do, he does, and he wants that too.

Climate Science Is A Hoax: Big Oil, The GOP And God Say So (Paul B. Farrell)

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Let’s all get dancing and look around us while we do! That should help.

Dancing Honeybees Assess The Health Of The Environment (New Scientist)

Eavesdropping may be rude, but snooping on honeybee conversations could reveal a lot about the environment. Their unique mode of communication, the waggle dance, contains clues about the health of the landscape they live in. In effect, the bees are giving a thumbs-up or thumbs-down to different methods of conservation. A worker honeybee performs the waggle dance to tell her hive mates where the best food is located. That suggests the dance can indicate areas of the landscape that are healthy, at least in terms of food for pollinators.

To test this, Margaret Couvillon and her colleagues from the University of Sussex in Brighton, UK, videoed and decoded 5484 waggle dances from three laboratory-maintained honeybee colonies living in 94 square kilometres of rural and urban landscapes. They divided the area into various conservation schemes, regulated by the UK government, and mapped which areas were most frequented by the bees over two years. “Using honeybee colonies as biomonitors for environmental health is an idea that researchers have been interested in,” says James Nieh from the University of California, San Diego. “However, this study uses a far larger sample size and examines the data in a more sophisticated way.”

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US House: Pentagon Can’t Treat Climate Change As Security Threat (RT)

The US House has voted to deny the Pentagon funding to combat impacts of climate change and its own heavy dependence on fossil fuels. The Department has long acknowledged the realities of global warming amid political wrangling over its effects. The House voted, mostly along party lines, to pass an amendment to the National Defense Authorization Act (NDAA) that aims to prevent the Pentagon from using appropriated funding to address the myriad national security concerns the Department of Defense (DOD) has said climate change poses to American interests.

The amendment to the NDAA, which sets the terms of the DOD budget, was sponsored by Rep. David McKinley (R), whose home state of West Virginia is deeply invested in coal development. The full text of the amendment reads: “None of the funds authorized to be appropriated or otherwise made available by this Act may be used to implement the U.S. Global Change Research Program National Climate Assessment, the Intergovernmental Panel on Climate Change’s Fifth Assessment Report, the United Nation’s Agenda 21 sustainable development plan, or the May 2013 Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order.”

In response, Democratic Reps. Henry Waxman and Bobby Rush said the “McKinley amendment would require the Defense Department to assume that the cost of carbon pollution is zero,” in a letter to House colleagues before Thursday’s vote. “That’s science denial at its worst and it fails our moral obligation to our children and grandchildren.” The amendment specifically targets the findings and recommendations of the recent National Climate Assessment (NCA) and the latest yearly climate report from the United Nations-sponsored Intergovernmental Panel on Climate Change (IPCC).

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Mar 132014
 March 13, 2014  Posted by at 3:06 pm Finance Tagged with: , , , ,  13 Responses »

Carl Mydans Auto transport at Indiana gas station. May 1936

Britain’s Institute of Economic Affairs (IEA) recently issued a report on the future of pensions and healthcare that reads as one big warning sign. But the chances that the warning will be heeded are slim to none, simply because the task is too daunting for both politicians and their voters to even begin to contemplate.

No politician who tells the truth about the report’s contents has a chance in frozen over hell of being elected, and thus the issues, which have been many decades in the making, will simply continue to be ignored by everyone. Until the dam breaks and perhaps the first shot is fired. But then it will be way too late. Not that it isn’t already. It’ll be interesting to see how people across the board claim ignorance and innocence, but it will of course do nothing to even come close to solving anything at all.

And frankly speaking, there are no solutions available within the present political system that could be executed and still let people get away relatively unscathed. We seem to have reached an inherent and built-in boundary and limitation of the democratic system, an event horizon of which we are bound to see a lot more going forward. What some 20 years ago Jay Hanson phrased as

“Democracy only works until people realize they can vote themselves an ever bigger piece of the pie”

IEA program director Philip Booth says in these words:

For too long people have voted themselves benefits to be paid for by the next generation of taxpayers, not by sacrifices that they will make themselves.

It truly is democracy as a Ponzi scheme. A development that has been so carefully and utterly neglected and ignored that bringing it out into the open risks evoking such severe denial that entire societies could be ripped to shreds, with one group teaming up against the other in clashes that can easily turn violent. Or, in Booth’s words:

We have never been in a situation like this before. It is quite possible that we will not find our way through without serious social breakdown and/or mass emigration of the most mobile and productive people.

And it all seemed to be going so well for so long, with cars and smartphones and far away vacations and retirement bungalows in the sun for – almost – everyone. People believed it because they wanted to believe it, and politicians were all too eager to prolong the dream that for the first time in history everyone could live like kings and queens of old. Cheap energy was one leg of the dream, ignoring future consequences of present behavior was another. Booth:

“The underlying problem is that successive governments have made promises which can simply not be honoured from the existing tax base. The electorate is grazing a fiscal commons at the expense of future generations … “

The price must now be paid. There is no more postponing the inevitable. First, retirement age will go to 70, then 75, and then the point will come when there’s no money left for any pensions or other entitlements. We will also return to large numbers of people dying of entirely preventable afflictions, simply because healthcare systems become unaffordable, because the base of people paying taxes shrinks, while the number of those who need care rises exponentially as the population ages.

Here’s the Telegraph article the quotes come from:

UK faces ‘crippling’ tax rises and spending cuts to fund pensions and healthcare

Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population, according to the Institute of Economic Affairs. The IEA calculated the Government would need to slash spending by more than a quarter or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities. “As populations age, tax bases will grow more slowly while government spending rises faster,” the report said.

… the think-tank said Britain faced tax rises equivalent within just two years to more than 17% of GDP – more than £300 billion ($500 billion) – in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.[..] … tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues”.

Can you imagine such tax raises? While the economy is in the doldrums? Me neither. But that would mean:

In the absence of further tax hikes [..] total spending would have to be cut by more than 25% or health and welfare expenditure by 53% compared with the current implied level if all future spending was to be met out of tax revenue.

[..] … it said policies were being implemented too slowly and were “inadequate” on their own [..] … policies to address pension saving and healthcare costs were needed now or the problem would quickly grow out of control. “Without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits [..]

The IEA calculated that delaying crucial pension and healthcare reforms by just a few years would dramatically increase the burden because of growing debt interest payments. It said the ratio would increase from 13.7% of GDP in 2010 – already higher than the EU average of 13.5% – to almost 17.1% by 2016 if no policy adjustments were made.

People will be forced to work longer and longer, till they’re 75, 80 and so on. And they’ll be forced to pay a fast growing part of their healthcare bill themselves. And even then both healthcare and pension systems have no chance of surviving in the long run. Because too many people have been promised too much for too long.

And just in case you were thinking that raps her up, here’s another piece of fine news from yesterday:

UK Interest Rates Could Rise Sixfold In Three Years (Telegraph)

Interest rates will rise six-fold by 2017 as Britain’s economy becomes one of the fastest growing in the developed world, the Bank of England Governor said on Tuesday. The increase to more “normal” levels will be welcomed by many savers who have faced record low rates for more than six years, but is likely to plunge many borrowers into financial difficulty. Mark Carney said that Bank rate could reach 3% within three years, six times the current 0.5%.

[..] Industry calculations suggest that an increase of 2.5 percentage points on a typical £150,000 repayment mortgage would push up monthly payments by around £230 a month. For interest-only mortgages, the rise would be even steeper. The cost of servicing an interest-only loan that tracks the Bank rate plus 1% would jump from £188 a month to £500.

Nationwide, one of Britain’s biggest mortgage lenders, said last month that the long period of low rates had left a generation of house- buyers with no experience of higher borrowing costs, leaving some at financial risk. Around 8% of all mortgage- holders currently have to spend more than 35% of their pre-tax income paying off the loan. Bank data suggests that this proportion would double if rates rose by 2.5 percentage points.

Mr Carney said the Bank was now carrying out more research into how many borrowers are “most vulnerable” to higher rates.

Yup. Your taxes will go up, slowly at first because the government will delay dealing with serious issues as long as it can get away it, and faster later when they have no such choice left. Meanwhile, interest rates will rise, which is bad news if you have debt, which is about everyone. And it’s not just your debt: there’s a lot of government debt that will need to be serviced, and guess how we’re going to pay for that? Raise taxes.

This simple pattern is not exclusive to Britain at all of course, but then you know that. This is what will happen in every western – formerly – rich country. And you can therefore safely ignore any proclamations about recovery. The first major hit, developing as we speak, is Japan, where people are more cautious and fearful and perhaps better informed. The Japanese started cutting back on their spending 20 years ago (they stopped buying things they didn’t need), and are now in a deflation that no stimulus will get them out of anymore (it’ll just make it worse).

But at least they have savings. In most formerly rich countries, people have counted on entitlements instead of savings. And now those entitlements turn out to be based on elaborate Ponzi schemes, sanctioned by successive governments that all had one thing in common: short term views.

David Stockman knows a thing or two …

Yellenomics: The Folly of Free Money (David Stockman)

The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon.

Let’s see. The Russell 2000 is trading at 85X actual earnings and that’s apparently “within normal valuation parameters.” Likewise, the social media stocks are replicating the eyeballs and clicks based valuation madness of Greenspan’s dot-com bubble. But there is nothing to see there, either–not even Twitter at 35X its current run-rate of sales or the $19 billion WhatsApp deal. Given the latter’s lack of revenues, patents and entry barriers to the red hot business of free texting, its key valuation metric reduces to market cap per employee–which computes out to a cool $350 million for each of its 55 payrollers. Never before has QuickBooks for startups listed, apparently, so many geniuses on a single page of spreadsheet.

Indeed, as during the prior two Fed-inspired bubbles of this century, the stock market is riddled with white-hot mo-mo plays which amount to lunatic speculations. Tesla, for example, has sold exactly 27,000 cars since its 2010 birth in Goldman’s IPO hatchery and has generated $1 billion in cumulative losses over the last six years—–a flood of red ink that would actually be far greater without the book income from its huge “green” tax credits which, of course, are completely unrelated to making cars. Yet it is valued at $31 billion or more than the born-again General Motors, which sells about 27,000 autos every day counting weekends.

Even the “big cap” multiple embedded in the S&P500 is stretched to nearly 19X trailing GAAP earnings—the exact top-of-the-range where it peaked out in October 2007. And that lofty PE isn’t about any late blooming earnings surge. At year-end 2011, the latest twelve months (LTM) reported profit for the S&P 500 was $90 per share, and during the two years since then it has crawled ahead at a tepid 5 percent annual rate to $100.

So now the index precariously sits 20% higher than ever before. Yet embedded in that 19X multiple are composite profit margins at the tippy-top of the historical range. Moreover, the S&P 500 companies now carry an elephantine load of debt—$3.2 trillion to be exact (ex-financials). But since our monetary politburo has chosen to peg interest rates at a pittance, the reported $100 per share of net income may not be all that. We are to believe that interest rates will never normalize, of course, but in the off-chance that 300 basis points of economic reality creeps back into the debt markets,that alone would reduce S&P profits by upwards of $10 per share.

America’s already five-year old business recovery has also apparently discovered the fountain of youth, meaning that recessions have been abolished forever. Accordingly, the forward-year EPS hockey sticks touted by the sell-side can rise to the wild blue yonder—even beyond the $120 per share “ex-items” mark that the Street’s S&P500 forecasts briefly tagged a good while back. In fact, that was the late 2007 expectation for 2008—a year notable for its proof that the Great Moderation wasn’t all that; that recessions still do happen; and that rot builds up on business balance sheets during the Fed’s bubble phase, as attested to by that year’s massive write-offs and restructurings which caused actual earnings to come in on the short side at about $15!

In short, recent US history signifies nothing except that the sudden financial and economic paroxysm of 2008-2009 arrived, apparently, on a comet from deep space and shortly returned whence it came. Nor are there any headwinds from abroad. The eventual thundering crash of China’s debt pyramids is no sweat because the carnage will stay wholly inside the Great Wall; and even as Japan sinks into old-age bankruptcy, it demise will occur silently within the boundaries of its archipelago. No roiling waters from across the Atlantic are in store, either: Europe’s 500 million citizens will simply endure stoically and indefinitely the endless stream of phony fixes and self-serving lies emanating from their overlords in Brussels.

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Russia Said to Ready for Iran-Style Sanctions (Bloomberg)

Russian government officials and businessmen are bracing for sanctions resembling those applied to Iran after what they see as the inevitable annexation of Ukraine’s Crimea region, according to four people with knowledge of the preparations.

Iran-style retaliation from the West, which would include freezing Russia’s foreign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst case, according to the people, who asked not to be identified as talks are confidential. Still, officials are calculating the economic cost of a sanctions war with the West, the people said. “If Russia begins to answer sanctions with sanctions, it will be a pure loss for the country,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said by phone. “More than 40% of consumption is imported goods.”

Some Russian political leaders are hoping that President Vladimir Putin will moderate his response to the crisis, the people said. Putin is consulting with the security forces and military about Ukraine, and some officials are afraid to voice opposition to what they see as a course he’s already chosen, two of the people said. Russia retaliating with sanctions against the West could wipe out 10 years of achievements in financial and monetary policy, one of the people said. Such escalation could erase as much as a third of the ruble’s value, another said.

The ruble has slumped 9.8% against the dollar this year, the worst-performer after Argentina’s peso among 24 emerging-market currencies tracked by Bloomberg. The yield on Russia’s February 2027 ruble bond was unchanged from yesterday’s record-high close of 9.36%.

The Ukraine crisis triggered the worst standoff between Russia and the West since the end of the Cold War after Russian forces seized the Crimean peninsula. German Chancellor Angela Merkel said today Russia risks “massive” political and economic damage, after saying yesterday that a round of European Union sanctions is “unavoidable” if Putin’s government fails to take steps to ease tensions. [..]

The government is in talks with Russian billionaires and state companies about risks they face in case of Western sanctions, the people said. The Kremlin needs to know which companies are most likely to be affected by fallout including loss of access to new foreign loans and the prospect of margin calls, they said.

Business is not yet showing too much concern about the possible sanctions, according to three top executives who took part in the meetings. The EU, Ukraine and Russia are economically dependent on each other in many regards, so strict sanctions will be hard on all sides, Putin has said. “In the modern world, when everything is interconnected and everybody depends on each other one way or another, of course it’s possible to damage each other — but this would be mutual damage,” Putin told reporters March 4.

The Russian economy’s prospects in a “difficult global economic environment” were the topic of a closed meeting between Putin and senior officials yesterday in the Black Sea resort of Sochi, Peskov said by phone. Putin yesterday urged the government to ensure Russia’s “ability to react immediately to internal and external risks.”

The Russian government is also in talks with companies about speeding up state support in the form of guaranteed loans to reduce potential damage from sanctions, said two of the people. Business leaders have asked for a meeting with Russian Prime Minister Dmitry Medvedev to discuss the situation, the people said.

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The Truman show meme shows up more frequently, and it’s not a bad analogy.

Hedge fund managers face up to ‘Truman Show’ markets (FT)

In the Truman Show, the late nineties Hollywood film, the eponymous character lives a seemingly charmed world, snuggled comfortably into an American suburbia of white picket fences and crisply cut lawns. But gradually Truman starts to notice something is not quite right. He is actually trapped inside a film set controlled by hidden directors, and discovers to his horror that he is the unknowing star of the world’s most popular reality TV show.

The question some of the world’s biggest hedge funds are starting to ask is whether overly placid investors will also wake up to discover they are living in a “Truman Show market” – where central bankers’ ultra loose monetary policy has manufactured a fake reality that is bound to end. For Seth Klarman, the manager of the $27bn hedge fund the Baupost Group who recently coined the analogy in a letter to clients, investors have been lulled into a false sense of security that is creating an ever greater risk of a sharp correction.

“All the Trumans – the economists, fund managers, traders, market pundits – know at some level that the environment in which they operate is not what it seems on the surface,” Mr Klarman wrote in his letter, later adding: “But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end.”

But no matter how sceptical hedge fund managers may be, they find themselves in a bind. While the assumption that central bank bond-buying will continue for the foreseeable future has been a boon to broader markets, indiscriminately surging equities have made life frustrating for most specialised stock pickers.

At the same time other hedge fund strategies, such as making bets on interest rates and currencies according to views on the direction of the global economy, have faltered as markets have refused to obey previously presumed iron rules, such as money printing leading to devaluation. Of late these so-called global macro funds have retreated from such trades as their performance has suffered.

“Many hedge funds continue to predict this ongoing drift upwards in asset prices due to an implicit backstop from central banks, who want to believe they are omnipotent, and that when data is bad they can just turn on the taps again and make it go away,” says Anthony Lawler, portfolio manager at GAM, one of the world’s biggest investors in hedge funds. As a result, while many managers feel deeply uneasy with the lofty valuations attached to certain parts of the US stock market, and low returns offered by risky assets such as junk bonds, few are willing to step out just yet.

More recently, encouragement has been taken from falling correlations between assets, meaning some portfolio managers are confident they can start to exploit more effectively the pricing anomalies between better and worse quality securities. “The number of individual stocks mispriced to each other is high, there are some trading on vapour whilst others are still trading on reasonable valuations,” says Luke Ellis, president of Man Group, the world’s largest listed hedge fund. “Are there lots of cheap stocks? No, but on a long short basis there are opportunities.”

“The big question is when this is all going to change. From a purely intellectual point of view, it is interesting how central banks will reverse their policies. From a market point of view, it is uncertain and complicated.”

Sir Michael Hintze, chief executive and founder of CQS, one of Europe’s largest hedge funds, has argued that loose central banks have actually increased the riskiness of markets as a result of their policies forcing too much money into the same assets, meaning any corrections are likely to be sharper than normal. “Everyone is thinking the same and being driven into the same trade,” he wrote in a note to clients. “Shifts when moving from one state to another can be difficult and abrupt. It is not healthy to have a ‘rigged’ market”.

Yet, for now, as long as markets continue to believe in the willingness and ability of central bankers to maintain current conditions, few hedge fund managers are ready to make any big bets against a reversal. “Few argue that equities are cheap on any metric, but the majority of hedge fund managers are opting to remain invested,” says Mr Lawler of GAM. The Truman Show market looks set to continue, even if an increasing number of participants have started to spot the cameras hidden behind the trees.

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America must get rid of the Fed and the big banks, or it will turn into a scorched landscape.

Engine Of Wall Street Profits Sputters In First Quarter (FT)

Wall Street’s once lucrative fixed income divisions are set for their worst start to the year since before the financial crisis, with revenue declines of up to 25% prompting banks to plan more redundancies on top of the tens of thousands of job cuts they have already made.

Citigroup and JPMorgan Chase have warned publicly that fixed income revenues – the engine of most investment banks’ profits since 2000 – will be down by double digits when they report first-quarter earnings next month. But other banks privately warn that their year-on-year declines could exceed 25% after both institutional investors and banks shied away from trading. The first quarter is traditionally a high point for revenues. “Effectively, the casino is empty this quarter,” said Brad Hintz, analyst at AllianceBernstein.

The top 10 banks are expected to make a combined $24.8bn of revenues in fixed income trading, which includes bonds, currencies and commodities, according to Morgan Stanley and Credit Suisse estimates, more than 40% below the first quarter of 2009 when the market rebounded sharply from the crisis.

Two of the top five fixed income divisions told the Financial Times they expected to respond by cutting more jobs because the market is worse than expected, with traders blaming patchy macroeconomic data, interest rate uncertainty, regulation that limits risk taking and worries about the situation in Ukraine. Analysts now expect Goldman Sachs to record its weakest first quarter since 2005 and JPMorgan Chase and Bank of America are forecast to see their lowest revenues since they bought Bear Stearns and Merrill Lynch, respectively, in 2008.

The weakness is expected to be even more severe among European banks such as Deutsche Bank and Credit Suisse, which are looking to meet new capital requirements by shrinking their balance sheets. “Anecdotally it seems Europeans are losing most share in the US itself and so are losing global diversification,” said Huw van Steenis, analyst at Morgan Stanley. Some US banks hope their European rivals will cede market share. “Those outside of the top five will have to think about if they can continue to be in that business,” said James Chappell, analyst at Berenberg.

New regulations such as the Volcker rule – which prohibits proprietary trading – and tougher capital requirements restrict the risk banks can take and are sapping liquidity, bankers say, even though final versions of the rules have not proven as harsh as some feared.

Four years after the outlines of the post-crisis regulation were put into place, traders claim that outstanding areas of uncertainty are hitting activity among big bond traders such as JPMorgan, Citi, Deutsche Bank, Bank of America, Goldman and Barclays. “There’s a significant amount of uncertainty about what the endgame is going to be,” said the head of trading at one bank. “We probably haven’t reached a peak of effort and management time. We’re not turning the page yet on regulation.”

Christian Bolu, analyst at Credit Suisse, estimated that US government bond trading volumes are down about 8% so far this year compared with the same period in 2013. Trading of mortgage-backed securities backed by the US government is down 41%, while corporate bond trading has increased by 12%.

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Funny to see how George Soros says Europe is the only place that got it right, while others, like Ambrose Evans-Pritchard here, say it got it terribly wrong.

Paralysed ECB leaves Europe at the mercy of deflation shock from China (AEP)

Most of western Europe is already in outright deflation. So are the Balkans, the Baltic states and the old Habsburg core. The Continent has left its flank open to an external shock from Asia. There is a high chance that this will occur as China attempts to extricate itself from a $24 trillion credit misadventure by debasing its currency to regain lost competitiveness and bail out its export industry.

The yuan has fallen by nearly 2% against the dollar since early January, and 4% against the euro. For all the talk of weaning China off chronic over-investment, Beijing engineered a record $5 trillion of investment in fixed capital last year – up 20% from the year before, and as much as the US and Europe combined. This has created a vast overhang of excess manufacturing capacity in the global system. It is coming our way in the form of a slow, powerful, deflationary undercurrent.

Europe’s headline price data understate the full deflation risk. Eurostat’s HICP index “at constant taxes” – stripping out the one-off effects of austerity – shows that 23 of the EU’s 28 countries have seen a fall in prices over the past seven months. “The risk of deflation is definitely before us,” said Olivier Blanchard, the International Monetary Fund’s chief economist.

By this measure, inflation since June has been running at a rate of -1% in France, -2% in Holland, Belgium and Slovenia, -4% in Italy, Spain and Portugal, -6% in Greece and -10% in Cyprus. Sweden and Switzerland are also in deflation. Germany rolled over in July. The UK still clings to a little inflation – now a precious commodity – but it too turned negative in September.

This is a nightmare for the debt-stricken states of southern Europe, still trapped in a slump with mass unemployment regardless of whether they manage to eke out the odd quarter of miserable growth. With Germany at zero inflation, they have to go into even deeper deflation to claw back lost competitiveness within EMU under “internal devaluations”.

This, in turn, plays havoc with debt dynamics through the denominator effect. Their debt loads are rising on a base of flat or contracting nominal GDP. It is a key reason why Italy’s public debt has risen from 119% to 133% of GDP since 2010 despite achieving a primary budget surplus, or why Portugal’s debt jumped from 94% to 129% (IMF data).

These countries have an impossible task, damned if they do and damned if they don’t. Mr Blanchard said their gains in competitiveness risk being overwhelmed by a rise in the “real value” of their debt. “The danger is that the second effect dominates the first, leading to lower output and further deflation.”

There is, of course, no magic line when inflation falls below zero. A recent IMF study said the effects become lethal for economies with high public/private debt loads – mostly over 300% of GDP in Club Med – even at “lowflation” rates. The European Central Bank is betting that this downward lurch in prices is a temporary blip due to lower energy costs, insisting that inflation expectations remain “firmly anchored”. The collapse of iron ore and copper prices over recent days – on China jitters – should puncture these illusions.

The ECB’s expectations doctrine is in any case a Maginot Line. “Long-term inflation expectations on the eve of three deflationary episodes in Japan were also reassuringly positive,” said the IMF. Indeed, they were a lagging indicator and therefore useless. “One needs to act forcefully before deflation sets in,” said the Fund, adding that the Bank of Japan was too slow to cut rates and boost the money base. “In the event, it had to resort to ever-increasing stimulus once deflation set in. Two decades on, that effort is still ongoing.”

BoJ governor Yasuo Matsushita said as late as January 1998 that there was “no reason to expect that overall prices will drop sharply and exert deflationary pressure on the entire economy”. As a result of this lordly certitude, Japan suffered shattering effects when the East Asia crisis entered its second and more deadly phase that summer.

The ECB’s Mario Draghi risks going down in history as Europe’s Mr Matsushita, as he continues to insist that EMU inflation today is merely where it was in 2009 (in the post-Lehman mayhem) and therefore benign, and that Euroland is not remotely like Japan. “The ECB has taken decisive action at a very early stage of this crisis,” he said. The proof is in the monetary pudding, and this shows that EMU is already in worse shape than Japan in early 1998 by a large margin. Private lending is contracting at 2.3%, the M3 money supply has ground to a halt and EMU-wide unemployment is stuck at a near-record 12%.

The ECB is by definition ferociously tight. Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, is right to berate the bank for betraying its primary duty, demanding €60bn of bond purchases each month before it is too late. “It is high time for the ECB to act. Otherwise Europe risks falling into a dangerous downward spiral,” he said.

Euro Intelligence said failure to act would be “an existential disaster for the eurozone” and a “shocking derogation” of the ECB’s mandate. Mr Draghi has bent over backwards to assuage the hard-money monks at the Bundesbank – much to the fury of one ex-ECB governor who told me he had become the “captive” of Right-wing German elites – judging that it would be too risky for the Latin Bloc and their allies to mobilize their majority voting power and force through a reflation policy.

His task has become even more complicated since the German constitutional court ruled last month in thunderous language that the ECB’s bond rescue plan for Italy and Spain (OMT) “exceeds the ECB’s monetary policy mandate, infringes the powers of the Member States, and violates the prohibition of monetary financing of the budget”. It also said the OMT is probably “Ultra Vires”, meaning that the German Bundesbank may not take part.

The ruling is not final – and does not prohibit ECB bond purchases as such – but it raises the bar for quantitative easing to a punishingly high level. While the Fed and the Bank of England were able to act instantly once it became clear that QE on a huge scale was imperative, the ECB is paralysed by politics, ideology and judges.

There have been dovish mutterings from ECB members over recent days but any action is likely to be confined (for now) to token gestures such as a negative deposit rate or easier collateral rules for banks, not the €1 trillion blast of QE that is so obviously needed immediately. The rise in the euro to €1.39 against the dollar tells us that markets expect nothing of substance.

Europe is left at the mercy of world events. The Fed is pressing ahead with $10bn of tapering each meeting, slowly forcing up the global price of credit and tightening the vice further for emerging markets. The bank has ignored the pleas for mercy from the developing world – still addicted to dollar liquidity – just as it did in the months before the Asian crisis in 1998. The OECD warned this week that the real impact of Fed tapering has “only just begun” and the effects threaten to ricochet back into Europe through trade and banking stress in emerging markets.

China is tightening as well in what amounts to a G2 monetary squeeze. It has been so successful that shadow banking virtually froze in February, prompting the central bank to step back in consternation at its own handiwork. Some have a touching faith that the Communist Party knows what it is doing, even though it is the same body responsible for just having blown the most spectacular credit bubble of modern times, more than a match for the pre-Lehman booms in Greece, Spain or Ireland in character and much greater in scale. I prefer the Chinese metaphor of feeling the stones beneath the water, their way of saying trial and error.

China will not collapse because the banking system is an arm of the state, but it will have to cope with the colossal malinvestments left from a hubristic five-year blow-off. Deflation is already stalking the country. Factory gate inflation has dropped to -2%.

We can be sure that China will seek to pass this deflationary parcel to somebody else, just as the Japanese have already done with their epic devaluation under Abenomics. The package will land in Europe, the one region that lacks a proper central bank and the governing coherence to protect its own interests. The implications for the depression-wracked societies of the Mediterranean are nothing less than calamitous.

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UK faces ‘crippling’ tax rises and spending cuts to fund pensions and healthcare (Telegraph)

Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population, according to the Institute of Economic Affairs. The IEA calculated the Government would need to slash spending by more than a quarter or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities. “As populations age, tax bases will grow more slowly while government spending rises faster,” the report said.

In a stark warning, the think-tank said Britain faced tax rises equivalent within just two years to more than 17% of GDP – more than £300bn – in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.

Philip Booth, the IEA’s programme director, said tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues. “The underlying problem is that successive governments have made promises which can simply not be honoured from the existing tax base. The electorate is grazing a fiscal commons at the expense of future generations,” he said.

In the absence of further tax hikes, Jagadeesh Gokhale, the author of the report, said total spending would have to be cut by more than one quarter or health and welfare expenditure by 53% compared with the current implied level if all future spending was to be met out of tax revenue.

While the IEA said increases to the state pension age would help to soften the blow of future tax rises, it said policies were being implemented too slowly and were “inadequate” on their own. Mr Gokhale said policies to address pension saving and healthcare costs were needed now or the problem would quickly grow out of control. “Without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits,” the report said.

The IEA calculated that delaying crucial pension and healthcare reforms by just a few years would dramatically increase the burden because of growing debt interest payments. It said the ratio would increase from 13.7% of GDP in 2010 – already higher than the EU average of 13.5% – to almost 17.1% by 2016 if no policy adjustments were made.

“We have never been in a situation like this before. It is quite possible that we will not find our way through without serious social breakdown and/or mass emigration of the most mobile and productive people,” said Mr Booth. The report also warned that governments would not be able to grow their way out of trouble, and were too often “fixated” on short term growth. It said while the Government’s decision to move assets of the Royal Mail pension fund had reduced short-term debt measures, long-term state pension liabilities had increased.

“The Government took the assets of the Royal Mail pension fund and gave the workers promises of government pensions in return,” the report said. “The explicit government debt was reduced but future government liabilities – in this case contractual – were increased.”

“Without reform, today’s young people are likely to be disappointed, either in terms of higher tax rates or in terms of reduced future benefits provided by government,” said Mr Booth. “The quicker the government changes policy, the more painlessly the situation will be resolved. For too long people have voted themselves benefits to be paid for by the next generation of taxpayers, not by sacrifices that they will make themselves.”

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A whole list of China related articles that all keep on pointing to the country’s vulnerability because of all the credit created there off late.

China premier warns on economic slowdown as data fans stimulus talk (Reuters)

Chinese Premier Li Keqiang warned on Thursday that the economy faces “severe challenges” in 2014 – comments that came as weak data fanned speculation the central bank would relax monetary policy to support stuttering growth. Li, speaking at a news conference on the final day of China’s yearly parliament, hinted Beijing would tolerate slower economic expansion this year while it pushes through reforms aimed at providing longer-term and more sustainable growth.

Data released shortly after his comments suggested that tolerance may face an early test. Growth in investment, retail sales and factory output all slumped to multi-year lows, suggesting a marked slowdown in the first two months of the year. “A storm is coming,” said Gao Yuan, an analyst at Haitong Securities in Shanghai, while Hao Zhou, the China economist for ANZ said “policy easing should be imminent.”

At the carefully orchestrated briefing where questions had to be vetted in advance, Li spent most time discussing the economy. But he also touched upon other topics, including friction in relations with Washington, corruption, pollution, and the disappearance of a Malaysia Airlines aircraft. While acknowledging the economy faced difficulties, Li suggested Beijing would not let growth slip too far. The government has targeted a rise of GDP in 2014 of 7.5% after actual growth last year of 7.7%. “We believe we have the ability, and all the means, to ensure that economic growth will stay within a reasonable range this year,” he said.

He also signaled the government will allow further debt defaults after Shanghai Chaori Solar Energy Science and Technology Co Ltd failed last Friday to pay an interest payment on its five-year bonds. The first default on a domestic bond was hailed by experts as a landmark that will impose more market discipline, a break from the past when bonds enjoyed an implicit guarantee because the government would bailout troubled firms to ensure stability.

Growth in Chinese corporate debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260% to 4.74 trillion yuan ($777.3 billion) between December 2008 and September 2013. “We are reluctant to see defaults of financial products, but some cases are hard to avoid,” Li said. “We must enhance oversight and solve problems in a timely way to ensure no systemic and regional risks.” [..]

The signs of a slowdown in the economy this year have raised worries among some investors that China will miss the 7.5% growth target. “The momentum is really quite weak,” Wei Yao, China economist for Societe Generale said after Thursday’s data. “Q1 GDP growth is probably already below 7.5%. The government will probably do some easing.” Yao said she expected the central bank to reduce bank reserve requirements by 50 basis points. Major banks currently have to put aside a fifth of their cash as reserves and such a measure would represent the central bank’s strongest policy easing since 2012.

Li skillfully dodged a question on how far Beijing would let economic growth slip before it steps in with policy measures to support activity. Still, he hinted at tolerance for below-target growth, as long as enough new jobs are created. “The GDP growth target is around 7.5%. ‘Around’ means there is some flexibility and we have some tolerance,” he said, adding that the lower limit on growth must ensure job creation.

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China Data Show Economy Cooling as Indicators Trail Estimates (Bloomberg)

China’s industrial-output, investment and retail-sales growth cooled more than estimated in the first two months of the year, signaling a slowdown in the economy as leaders seek to sustain 7.5% expansion. Factory production rose 8.6% in the January-February period from a year earlier, the National Bureau of Statistics said today in Beijing, compared with the 9.5% median projection of analysts surveyed by Bloomberg News. Retail sales advanced 11.8%, while fixed-asset investment excluding rural households was up 17.9%.

Premier Li Keqiang today said there’s some flexibility around the nation’s growth goal this year and that the government’s key concerns are jobs and livelihoods. Even so, an extended slowdown would add to chances of stimulus and test the Communist Party’s commitment to give market forces a bigger role in the world’s second-largest economy while clamping down on overcapacity, debt and pollution.

The Shanghai Composite Index (SHCOMP) pared gains after the data and was up 0.9% at 1:50 p.m. local time. China combines data for industrial output, retail sales and fixed-asset investment for January and February, citing distortions from the weeklong Lunar New Year holiday, whose timing differs each year.

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People in the west will continue to cut their discretionary spending, and that seals China’s fate.

China Export Prowess Wanes in U.S., Europe (Bloomberg)

The Made in China label is losing traction with its two biggest customers. After three decades of gains, China’s share of U.S. imports has plateaued and in Europe it’s in decline. The steepest losses are in the European Union, where China’s share of imports slumped to 16.5% in the first 11 months of last year, from a 2010 high of 18.5%, according to data compiled by Bloomberg News. In the U.S. the needle has barely moved in the past five years, holding around 19%.

China’s low-cost vantage has been blunted by rising wages and an appreciating currency, with cheaper nations including Vietnam and Bangladesh competing to sell products from T-shirts to shoes. With an unexpected drop in total exports in February compounding the challenges, the trends underscore the need for President Xi Jinping’s government to foster competitiveness in higher-technology items from semiconductor chips to medical-imaging equipment to airplanes.

“It’s a sea change,” said Andrew Tilton, chief Asia economist at Goldman Sachs Group Inc. in Hong Kong, who previously worked for the international office of the U.S. Treasury Department. “China’s period of unusually strong competitive advantage in exports may have run its course.”

The yuan has appreciated about 35% against the dollar since July 2005, wages have tripled in the past decade and China’s labor force has begun to shrink. The currency weakened today for a fourth day to 6.1435 per dollar, while the benchmark Shanghai Composite Index of stocks fell 0.2%.

The nation’s working-age population began declining in 2012, Chinese government data show. The pool of 15- to 39-year-olds — the backbone of factories making clothes and toys — has contracted by 35 million in the past five years, a U.S. estimate indicates. The changes have led global manufacturers to begin shifting production to countries such as Bangladesh and Vietnam, which surpassed China in 2010 as the largest supplier of Nike Inc. footwear. Higher costs and wages in China are prompting some Asian companies to set up manufacturing plans in neighboring countries. Samsung Electronics Co. is building a $2 billion plant in Vietnam that may make 120 million handsets by 2015.

U.S. and European clothing makers are also looking elsewhere. Some 72% of chief purchasing officers who oversee a collective $39 billion in annual purchases for apparel firms expected to shift to lower-cost nations — with Bangladesh, Vietnam and India as the top three destinations for the coming five years, a survey conducted by advisory firm McKinsey & Co. in 2013 shows.

More than a decade ago, China was the darling as it entered the World Trade Organization, with expanding commerce helping it boost growth, which averaged 10.6% in the decade that followed 2001. The nation also reshaped the world economy as China put cheap toys, souvenirs and jeans on shop shelves from New York to London to Paris.

Now, the beneficiaries of China’s slide in developed markets can be found as far away as Mexico. Its share of U.S. imports rose to 12.4% last year from 10.3% in 2008. Before China became a WTO member, Mexico’s proportion was 11.2%. As China’s competitiveness wanes, Mexico is benefiting from its proximity to the U.S. market and lower transportation costs, said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who formerly worked at the World Bank and the International Monetary Fund.

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China needs to solve its debt crisis, says former Treasury minister (Telegraph)

China’s debt issues are the country’s biggest economic concern and need to be tackled, former Treasury minister and chairman of the China-Britain Business Council Lord Sassoon has said. Lord Sassoon, a former Treasury mandarin as well as Commercial Secretary to the Treasury from 2010 to 2013, told The Telegraph that Chinese debt is a more pressing worry than the recent mixed figures concerning the country’s economic growth rate.

“I think the biggest question I would have, and China itself has in the short term, is the debt issues which they need to resolve. “If there’s something to focus on, it’s around banking, shadow banking, provincial debt and I don’t know where that will all land”, he said.

Last year, China’s local government debt surged to nearly £1.8trn, 67% higher than in 2010. The rise brought China’s total public debt, including money owed by central government, to 58% of its £5.11trn economy. Meanwhile, China’s banks have overseen a rapid expansion of lending that has seen £9.1trn of credit created, and figures released in February showed that under-performing loans made by Chinese banks have risen to the highest level since the financial crisis.

China’s debt overhang has raised concerns about a credit crisis and slowdown of China’s economy. Recent economic figures have shown a decline in manufacturing PMI and exports, but Lord Sassoon said he’s more focused on long-term developments. “I think people can get excessively excited about China’s short term numbers, which have been mixed in recent months. “For me, it’s not so much one month’s, one quarter’s trade figures”, he said.

He went on to say that he believes the Chinese government are prepared and able to tackle the problems, however. “The new Chinese leadership recognise they’ve got a big problem they need to deal with immediately around the overhang of the public sector, particularly provincial, debt. “I think there’s a lot of issues for the Chinese government to work on but they’re not hiding them and they’ve got very good people on the case”, he said.

Lord Sassoon said the Asian super-power’s banks were also prepared to address their own issues. “If you go and talk to the big state-owned banks, the four big Chinese banks are very open and interesting on the subject of loans to sectors where there’s been over-capacity and there are businesses that have failed or failing. “I happen to believe there will be a soft landing because it’s the quality of the people in Beijing who are managing these issues”, he concluded.

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Chinese yuan’s decline leaves observers guessing (Barry Eichengreen)

Since December, when the US Federal Reserve began tapering its monthly purchases of long-term assets, emerging-market currencies have fallen across the board. The main exception until recently was China’s indomitable yuan. But now the yuan, too, has been falling against the dollar. So is this more evidence of the disruptive impact of the Fed’s policy? The yuan’s decline is not large, and whether it will continue is uncertain. But the movement is striking by the standards of what is still a heavily managed currency. And it is in the opposite direction from what everyone has come to expect.

Certainly, the Fed’s tapering of its quantitative-easing policy has had some effect. A standard money-making strategy for investors with access to Chinese financial markets has been to borrow dollars at low interest rates and buy high-yield Chinese assets. But tapering, by auguring higher US interest rates, makes it more expensive to borrow dollars and invest in Chinese assets. As “the carry trade” falls out of fashion, demand for the yuan declines and its exchange rate depreciates.

But, while the Fed has been tapering since December, the weakness of the yuan materialised only in February. Evidently something else is going on. The reality is that China’s tightly controlled currency falls only when the People’s Bank of China wants it to fall. The PBOC, not the Fed, calls the tune to which the yuan dances. So why has it been singing the depreciation song?

One possibility is that a weaker yuan is, paradoxically, part of the Chinese government’s strategy for encouraging its wider international use. China is committed to broadening the yuan’s role for foreign trade and investment-related purposes. Ultimately, it would like to see the yuan achieve an international status comparable to that of the dollar.

To do that, China will have to develop its financial markets and open them to foreign investors. But opening those markets is feasible only if the authorities eliminate the perception that exchange-rate movements are a one-way proposition. So long as investors believe that the yuan can only appreciate, opening the country’s markets will cause it to be flooded by foreign money, with unpleasant financial consequences, not the least of which is inflation.

Foreign investors therefore need to be reminded that the yuan can fall as well as rise. Some observers regard the yuan’s recent slide as an attempt to squeeze the speculators and signal the advent of a more flexible exchange rate. They believe that the PBOC is about to widen the currency’s trading band.

If so, the PBOC’s recent market moves are a good thing. If there is one clear lesson from history, it is that the combination of open financial markets and a rigid exchange rate is a disaster waiting to happen. China has already begun opening its financial markets. Thus, greater exchange-rate flexibility is overdue.

A second, less positive interpretation is that the PBOC is weakening the yuan in order to boost Chinese exports. Reacting against excesses in the country’s property markets and shadow banking system, the PBOC has moved, not unreasonably, to limit the availability of cheap credit. But this may have caused domestic demand growth to slow more rapidly than expected. And boosting exports is, of course, China’s customary response to weaker domestic demand.

This less encouraging interpretation of the yuan’s recent weakening suggests that official efforts to clamp down on the shadow banking system are not going well, and that the effort to engineer a soft economic landing is not on course. If this view is correct, efforts to rebalance the Chinese economy could now be put on hold, which would not bode well for future economic and financial stability.

Moreover, if China is pushing down the yuan in order to goose its exports, its policy will not sit well with its foreign competitors, be they the US or Japan. Complaints about currency manipulation and the associated diplomatic tensions will quickly return.

China is sufficiently opaque that it is hard to know from the outside which interpretation is correct. Future yuan movements will tell the tale. Mainly up-and-down fluctuations would be a sign that the policymakers’ goal is to eliminate one-way bets and advance the cause of yuan internationalisation. A secular decline, by contrast, would indicate that demand in China is weakening and rebalancing has been suspended. For now, the only thing observers can do is to watch closely and hope for the best. And it is the PBOC they should be watching, not the Fed.

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Using copper as collateral to buy more copper. Isn’t life wonderful?

Copper sell-off following China bond default brings market to four-year low (Reuters)

China’s first domestic bond default has shaken the foundations of the copper market, stoking investor worries about the possible unravelling of financing deals that have locked up vast quantities of copper. This anxiety has led to three days of heavy selling in the metal, while having little noticeable effect on other global financial markets.

The Shanghai Futures Exchange’s most-traded copper contract reached its lowest level in more than four years on Tuesday, and the London copper benchmark fell to its lowest in more than three years later in the day. “A lot of that is linked to the financing deals and you start to wonder, ‘are they at risk?’ and I think that is what the market is indeed worried about, and that’s why copper has taken the brunt,” BNP Paribas analyst Stephen Briggs said.

The default on a bond payment by China’s Chaori Solar last week signalled a reassessment of credit risk in a market where even high-yielding debt had been seen as carrying an implicit state guarantee. On Tuesday, solar panel maker and power company Baoding Tianwei Baobian Electric announced a second straight year of net losses, leading to a suspension of its stock and bonds on the Shanghai Stock Exchange and stoking fears that it, too, may default.

The metals markets saw the default as a sign of tighter credit to come for users of metals and for financiers that have used the metal as collateral for borrowing, analysts said. If their loans are not renewed and financing deals start to unravel, the investors could unload their metal supplies on to the market.

Similar financing deals are in place using metals such as zinc and iron ore, but copper has been the preferred choice for the Chinese trade and finance community. “If there are worries in a general sense about financial conditions in China, copper is perhaps more exposed to that than other metals, because we’ve seen a substantial rise in inventories in China this year,” Briggs said.

At least one US scrap copper trader has suffered “large” losses after the Chinese default, one of the first signs that sinking prices and tightening credit are taking a toll on the physical market. Some analysts and traders estimated that 60% to 80% of China’s copper imports in recent years may have been used as collateral, although none of them could give a definitive figure for how much copper is now tied up in deals.

The mainland’s imports of copper products hit a record 536,000 tonnes in January, up 53% year on year, customs data showed. The inflow slowed in February to 379,000 tonnes but was still higher than in February 2013. Copper stocks in warehouses monitored by the Shanghai Futures Exchange are bulging, up 65% since early January to around 200,000 tonnes . Another 745,000 tonnes of the metal is held in bonded warehouses, minerals consultancy CRU estimated. No official figures are available.

“Given rising inventories, a negative arbitrage and a seemingly soft post-Lunar New Year increase in activity, we doubt that real demand lies behind the strong copper numbers,” Credit Suisse said in a research note. Benchmark Shanghai and London Metal Exchange copper prices have been falling steadily this year, mostly because of tepid economic growth in China, which accounts for more than 40 per cent of global demand for the metal.

But after the sharp price drops in recent days following the bond default, would-be importers in China are finding it tough to get credit. “Right now it is very difficult for clients to issue an LC (letter of credit) to import copper because the bank loan is very tight. Also if you import the copper in China, you will lose a lot of money,” one trader in Singapore said. [..]

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Want to grow? Get yourself an earthquake!

New Zealand Raises Key Rate, First Developed Nation to Tighten

New Zealand raised its key interest rate, the first developed nation to exit record-low borrowing costs this year, and said it plans to remove stimulus faster than previously forecast to contain inflation. “It is necessary to raise interest rates toward a level at which they are no longer adding to demand,” Reserve Bank of New Zealand Governor Graeme Wheeler said in a statement in Wellington after increasing the official cash rate by a quarter%age point to 2.75%, as forecast by all 15 economists in a Bloomberg News survey. The Kiwi gained after Wheeler said further increases are likely in coming months and the OCR may rise by a total of 125 basis points this year.

Soaring dairy prices, the NZ$40 billion ($34 billion) rebuild of earthquake-damaged Christchurch and the strongest immigration in 10 years are fueling growth in the South Pacific economy. Wheeler is departing from global peers as surging house prices in the nation’s biggest city of Auckland stoke concerns of a bubble and add to inflationary pressures. “We’re on a different planet,” Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington, said in an interview. “New Zealand’s environment is fundamentally different to most of our peers” because of record-high commodity prices and construction, he said.

The RBNZ today lifted its forecast for the 90-day bank bill rate, suggesting borrowing costs will rise more quickly than previously expected. The tightening is set to come in an election year, with Prime Minister John Key seeking a third term in a poll set this week for Sept. 20.

Wheeler will raise rates at his next two opportunities in April and June then pause until December, according to the median forecast in a Bloomberg News survey of 15 economists conducted after today’s decision. Six analysts expect a rise at the Sept. 11 review. “If the economic environment makes it a pre-requisite, then he’ll go, but any central bank governor would prefer to not get involved in the election,” said Toplis.

New Zealand’s dollar rose to its highest since May 1 after the RBNZ decision. It bought 85.59 U.S. cents at 5:36 p.m. in Wellington, up from 84.65 cents immediately before the statement. “The bank does not believe the current level of the exchange rate is sustainable in the long run,” Wheeler said, reiterating that the currency’s strength is a “headwind” for exporters and local manufacturers who compete against imports.

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Fonterra’s link to China is painfully strong.

New Zealand’s Fonterra, World’s Largest Dairy Exporter, In Guilty Plea Over Food Safety (BBC)

New Zealand’s Fonterra has admitted four food-safety violations following a botulism scare last year that led to recalls of milk products in China. Government officials had filed charges against the dairy company, accusing it of processing and exporting dairy products which did not meet standards. Fonterra is also accused of failing to issue notification about its products not being fit for consumption.

The charges come as Fonterra faces civil court action from Danone. Earlier this year, the French company said it was suing Fonterra over recalls which Danone alleged led to the company losing hundreds of millions of dollars in sales. Danone uses Fonterra ingredients in its infant milk formula. Maury Leyland, a Fonterra manager said: “We have accepted all four charges, which are consistent with the findings of our operational review and the Independent Board Inquiry.” The dairy co-operative has since stepped up its quality control procedures.

In August last year Fonterra sparked a worldwide product recall and food-safety scare when it admitted there could be a bacteria in one of its products which could cause botulism, a severe form of food poisoning. The product suspected of containing the bacteria which could cause botulism was commonly used in infant formula. But the bacteria scare turned out to be a false alarm when later tests found another strain, but of a less harmful kind which does not cause food poisoning.

The threat of botulism led to many countries including China blocking imports of dairy products from New Zealand. The import ban was lifted about three weeks after the initial scare. Fonterra is the biggest dairy firm in New Zealand, which is the world’s largest exporter of dairy products.

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If only we frack till we drop, we will be saved! Hmm, so shy do Shell just announce it’s getting out of US shale because it can’t manage to make it profitable?

EU parliament excludes shale gas from environmental code (Guardian)

EU politicians on Wednesday voted for tougher rules on exposing the environmental impact of oil and conventional gas exploration, while excluding shale gas. Member states such as Britain and Poland are pushing hard for the development of shale gas, seen as one way to lessen dependence on Russian gas, as well as to lower energy costs as it has in the United States. The plenary vote of the European Parliament in Strasbourg, France follows a compromise deal on the draft law in December, which was struck only after negotiators agreed to leave out references to shale gas.

Member states are expected to give their endorsement over the coming weeks, after which the law will become final. Under the planned law, assessments of a range of infrastructure projects, as well as oil and gas, will include their impact on biodiversity and climate change, plus measures to ensure authorities granting approval have no conflict of interest. Industry said the new law avoided placing too many restrictions on projects during their early phases when commercial viability is unclear.

While not imposing unnecessary requirements on the upstream oil and gas industry, the new rules will guarantee that any development, including exploration for shale gas, will be subject to strict environmental standards, Roland Festor, director for EU affairs at the International Association of Oil & Gas Producers, said. Shale Gas Europe, which brings together companies such as Chevron, Total and Cuadrilla Resources, also welcomed the law. Shale gas could potentially play an important role in meeting Europe’s acute energy challenges, Marcus Pepperell, spokesman for Shale Gas Europe, said.

Green politicians, however, said the decision to leave out shale gas was a major setback and that the fracking process, which involves using chemicals to extract gas from the shale rock, posed risks to health and the environment. The Greens believe there is already sufficient evidence to ban fracking but ensuring informed permit decisions through the environmental impact assessment procedure must be the absolute minimum, Sandrine Belier, environment spokeswoman for the European Greens, said.

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Euan’s conclusion: “We seem set to become increasingly reliant upon Russia for gas supplies that also provides our electricity security”.

Blackout Britain? (Euan Mearns)

Why is there a perception that the UK faces an ongoing risk of electricity grid failures? At the end of May 2013 the UK had 416 power stations, counting wind farms and hydro dams, ranging in nameplate capacity from 1 to 3870 MW. The combined capacity in 2013, following large combustion plant closures, was 80,514 MW down from 92,044 MW in 2012 (Figure 1). With peak winter demand roughly 55,000 MW there still seems to be ample spare capacity to guarantee electricity supplies (Figure 1). Why then is there so much talk on the media, blogs and from the CEO of National Grid about pending blackouts in Britain? The answer is not what many may presume it to be.

Figure 1 During the 1960s to the 1980s Britain was largely dependent upon coal and nuclear power for electricity supplies. Natural gas (CCGT) was introduced in the early 1990s and expanded year on year until 2004. At the end of that decade a second phase of CCGT building got under way adding a further 9,274 MW of capacity, which with hindsight appears to be an extraordinary investment decision. The closure of 11,530 MW of large combustion plants has resulted in the decline of UK generating capacity. The expansion of wind got underway in the early 21st century. Wind capacity is not varied into the future. It can be expected to grow some, but not at the historic rate since companies are becoming shy of investing in Britain’s chaotic energy market. Data from DECC table dukes5_11.

Britain has 31,637 MW of CCGT capacity (combined cycle gas turbines) but lacks access to sufficient gas to run this fleet at anything close to capacity. During the cold spell at the end of last winter when gas storage was run down to empty the maximum output from the CCGT fleet was 22,000 MW, just 70% of the installed capacity. The closure of 11,530 MW of large combustion plants (coal and oil) has of course created the electricity supply crisis. But given that these power stations are now gone, it is a shortage of gas that creates the current blackout risk.

Figure 2 shows the pattern of electricity demand in the UK for January and July 2009. In 2009, peak demand was 58.9 GW at 6pm on a Tuesday in January and the minimum demand was 22.3 GW at 6 am on a Sunday morning in July. Peak demand is 2.64 times greater than the minimum demand and the electricity delivery system requires the flexibility and controllability to match supply with demand exactly at all times.

Figure 2 UK electricity demand for January and July 2009 shows three cycles in the pattern of demand. The daily cycle has peaks during day time, with maximum demand normally at 6pm, and troughs at night. The weekly cycle shows increased demand Monday to Friday with reduced demand on Saturday and Sunday. The annual cycle shows increased demand in winter compared with summer. This provides a picture of activity and expectations of the society we live in. We like to stay warm in winter, we go to bed at night and we have weekends off work.

For the time being, blackout risk in the UK is confined to the short periods of peak winter demand that invariably occur at 6pm in the winter months. And the blackout risk is hightened towards the end of the winter when our’s and Europe’s gas storage has been run down. Figure 3 shows gas generating capacity curtailed to 22,000 MW which is an approximation for current gas supply limits. Wind, that is not dispatchable, is removed.

Figure 3 An approximation for the deliverability from UK power stations with CCGT curtailed to 22,000 MW and wind power removed. On a calm, cold weekday at the end of a long cold winter, there is a risk of blackouts in the UK and that risk will increase as the decade progresses.

This now shows the nature of the blackout risk that we face. Should we have a cold winter that drains storage and cold weather in February or March and little wind across the UK and near continent then there is a blackout risk, especially if there are outages at nuclear or other generating plant, which is quite common. This risk will increase towards the end of the decade if planned nuclear closures go ahead and if there are further closures of large combustion plants.

At present, understanding the blackout risk in Britain boils down to understanding the security of future gas supplies and that is not a simple task. The hightened blackout risk of March 2013 came about because of LNG Heading East as a consequence of the Fukushima nuclear disaster in Japan. Closer to home, UK supplies may get some relief in the next few years as a number of new projects come on line, and if there are significant shale gas discoveries. Offsetting that are plans in the Netherlands to cut production in the giant Groningen field and the inevitability of a future peak in Norwegian gas production. We seem set to become increasingly reliant upon Russia for gas supplies that also provides our electricity security.

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Tim Berners-Lee on 25 Years of the Web (Spiegel)

In March 1989, Tim Berners-Lee, 58, established a place for himself in the history books by creating the World Wide Web. That month, the Briton, who at the time worked for the European Organization for Nuclear Research (CERN), wrote a paper titled “Information Management — A Proposal.” His research led to the development of the first Web browser and, finally, the World Wide Web. Today, Berners-Lee is a professor at the Massachussetts Institute of Technology (MIT) and the University of Southhampton in England.

SPIEGEL ONLINE: You are considered to be the father of the World Wide Web. When you look at how your idea developed over time, do you view the Web more with pride, disbelief or concern?

Berners-Lee: All of the above. Certainly all the people who have been part the Word Wide Web can be very proud of what has been achieved, and especially about the spirit of collaboration behind this amazing development. That said: All that collaboration and working together is to a certain extent under threat, because the Web has become so powerful, because it has become such an important technology for everyday life and almost everything we do. Therefore there is a strong tendency for governments, big organizations and companies to try to control it.

SPIEGEL ONLINE: It isn’t just China and Iran that are attempting to control the Internet and spy on its users. Intelligence agencies in the country of your birth, Britain, and the United States are acting like hackers, undermining security and even encryption standards. How big is the loss of trust, in your view, and what can be done about it?

Berners-Lee: What that has shown is the lack of oversight over the spying systems both in the United Kingdom and the US. That needs to change. We need a serious overhaul of those social systems around spying. Any country that has a part of the government or the police spying on the Internet to combat crime must demonstrate that they have a very solid level of accountability and that the information they get is never abused. The privacy of the individual must be respected and the data captured cannot be abused for commercial purposes. What’s really great about Edward Snowden revelations is that they raise awareness about these problems and about the Internet and its integrity.

SPIEGEL ONLINE: Some countries and companies want to build regional safe havens for data. For example, Brazil wants to force international companies to store Brazilian customers’ data on servers located inside the country. Germany’s Deutsche Telekom is thinking of a Schengen Net that would keep data inside the EU. What is your take on that?

Berners-Lee: Any division or Balkanization of the Web into segments is a very bad idea. The reason we had this shoot growth of creativity on the Web that got us to where we are now, to this incredible richness, is that the Web has been a non-national, open, universal thing. It initially grew without any reference to national borders. It is only when you try to police the Internet that you need to use laws, and most sets of laws we have are nation-based. So we must be very careful to make sure the Internet remains open.

SPIEGEL ONLINE: You and others are launching a global campaign to ensure the legal protection of Web users’ rights internationally. What would you include in your personal Magna Charta for the Web?

Berners-Lee: First, I would like us to have that conversation together. That is why we created I want us to use this year to define the values that we as Web users are going to insist on. I would like every country to debate what that means in terms of their existing laws. In what areas must we enhance our regulations to guarantee fundamental rights on the Internet? The right to privacy must be in there, the right not to be spied on and the right not to be blocked. The commercial marketplace should be completely open. You should be able to visit any political website apart from the things that we all agree are illegal, nasty and horrible. Access to the Web is, of course, a fundamental right. As we celebrate the Web’s 25th anniversary, we need to think about the fact that less than half the world’s population uses the Web at all.

SPIEGEL ONLINE: How would you like to change that?

Berners-Lee: The advance of the mobile web has made the problem much easier to address. At best, a poor person in Africa will have a $10 mobile phone that still has no browser. The question now is how we can drive down the price of a basic smartphone with a browser on it. The next question is how we can we create data plans that are affordable and provide enough bandwidth to allow the user to participate in the Information Society. Then we need to them to write, share their creativity and not just read.

SPIEGEL ONLINE: You have suggested that the Web has developed quite well without national regulations. Do you see a role here for governments as well?

Berners-Lee: We started the Alliance for Affordable Internet (A4AI), which sees governments, NGOs and companies working together in order to overcome big drags.

SPIEGEL ONINE: What do you mean by “drags”?

Berners-Lee: Well, often there are seemingly “sweet deals” in which big foreign telecommunications companies offer to connect all schools for free in a certain country on the condition that they become the monopoly provider. That keeps prices high and hinders innovation. A4AI wants to make sure the regulatory landscape is good and to try to get companies to offer low start-up charges and fees for people who want to get onboard for the first time.

SPIEGEL ONLINE: Looking back 25 years, what was one of the most important milestones in the Web’s development?

Berners-Lee: When I first developed the Web technology at CERN in Geneva, there was another system called Gopher. I didn’t think it was as good as the Web, but it started earlier and had more users. At a certain point the University of Minnesota, which had created the Gopher system, said that in the future they would possibly charge a royalty for commercial uses. Gopher traffic immediately dropped off and people moved to the World Wide Web. CERN management then made a commitment — I can still remember the date, April 30, 1993 — that royalties would never be charged for using the Web. That was a very important step because it established a trend.

SPIEGEL ONLINE: So far the Web has been steered, administered and “governed” by many organizations. The US plays a dominate role through the Internet Corporation for Assigned Names and Numbers (ICANN), which manages the allocation of IP addresses and the .com and .net names of sites associated with them. Is this multistakeholder approach the right model for the next 25 years?

Berners-Lee: Nothing is perfect and every multistakeholder solution means hard work and involves a lot of communication. We need to revise how that works, but incrementally. It is also important for the US to formally let go of ICANN. But, yes, I think the solution for the future is a revised version of the existing multistakeholder model.

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Almost all animals see UV light. We do not.

Most Animals Can See UV Light, See Power Lines As Flashing Bands Across The Sky (Guardian)

Power lines are seen as glowing and flashing bands across the sky by many animals, research has revealed. The work suggests that the pylons and wires that stretch across many landscapes are having a worldwide impact on wildlife. Scientists knew many creatures avoid power lines but the reason why was mysterious as they are not impassable physical barriers. Now, a new understanding of just how many species can see the ultraviolet light – which is invisible to humans – has revealed the major visual impact of the power lines.

“It was a big surprise but we now think the majority of animals can see UV light,” said Professor Glen Jeffery, a vision expert at University College London. “There is no reason why this phenomenon is not occuring around the world.” Dr Nicolas Tyler, an ecologist at UIT The Arctic University of Norway and another member of the research team, said: “The flashes occur at random in time and space, so the power lines are not grey and passive, but seen as lines of light flashing.”

He said the discovery has global significance: “The loss and fragmentation of habitat by infrastructure is the principle global threat to biodiversity – it is absolutely major. Roads have always got particular attention but this will push power lines right up the list of offenders.” The avoidance of power lines can interfere with migration routes, breeding grounds and grazing for both animals and birds.

Autopsies on dozens of mammals from zoos and abbatoirs showed their eyes were able to see UV, including cattle, cats, dogs, rats, bats, okapi, red pandas and hedgehogs. Also on the list were reindeer and further work published in the journal Conservation Biology showed these animals, whose eyes are specially adapted to the dark Arctic winters, are particularly sensitive to UV light. UV vision helps reindeer find plants in snow cover, but in the depths of winter their wide irises and sensitive eyes means the power lines appear particularly bright.

The avoidance of power lines had been explained in the past by the corridors cut through forests to accomodate them, where animals would be exposed in the open to predators. But this explanation could not apply in the treeless tundra of northern Norway, where 220,000 reindeer are tended by 7,000 herders from the traditional Sami people. “Right now, there is a plan to build a 186-mile long power line in north Norway,” said Tyler. “This new work will encourage power companies to negotiate with herders about where they put the power lines.”

Around the world, Tyler said: “There are hundred of examples of animals avoiding power lines. Now we know that, not only do these clear-cut corridors mean exposure to predators, at the same time there is this damn thing flashing at you.” Jeffery said burying all power cables would be unrealistically expensive but added that one idea would be to put a non-conducting shield around the cable to screen it from view. The UV light, which is caused by electricity ionising the air around cables, are a major source of inefficiency for electricity companies and also cause the hissing or crackling noises sometimes heard.

Power companies already use helicopter-mounted UV cameras to monitor power cables, because the flashes can be an early sign of conduction problems, but the cameras only record a very narrow range of UV. “Animals see across the range, so the intensity of light seen by them is much more than seen by the helicopter flights,” said Jeffery.

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This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!

Jan 152014
 January 15, 2014  Posted by at 8:47 pm Finance Tagged with: , , , , ,  21 Responses »

Howard Liberman Fort Belvoir, Virginia. Soldier using a barbed wire anchor spike August 1942

Last week, there was a discussion in our comments section about the financial “crunch”, the big kahuna, and how it still has not happened despite our insisting it is inevitable, with people saying things like: ‘but the stock markets are way up!’, and ‘in my area home prices are up 30%’. As much as I understand the sentiments, at the same time I don’t really. Certainly for people who read The Automatic Earth, I would have thought it would be clearer what is going on “out there”. I have certainly written more articles than I care to remember about what goes on. Debt is what goes on.

Because in order to understand what really goes on in the world of finance, and the economy at large, today, you need to know only one word: debt (aka credit). And you then ask yourself with everything you read: what about the debt? It’s a question largely absent from the media, other than in yet another Mexican standoff at the US Congress about the debt ceiling.

But you don’t need to be an Einstein to figure out why the stock markets set records, or why housing prices in the US and UK are rising, even if the media prefer to ignore why they do. All you need is that one question: what about the debt? Once you start looking at things with that question always in the back of your mind, the picture becomes – literally – painfully clear.

As I put it in that comment thread:

“As for that crunch, being skeptical of a crunch is what we do, all the time, day after day after day. But all I see is a crunch that grows in size day by day, because people let themselves get fooled into thinking that not only can debt be paid off with more debt, but that they will actually profit from this being executed in their name, and with their money. Look, the S&P breaks another record! Well, you certainly earned that look, because you’re paying for it.

If people still think we were wrong, and are wrong, about that crunch, let’s talk, but they need something better to bring to the table than S&P records or home prices. Because we can’t have that conversation without looking at debt levels. And I think that’s where the turning point still is, whether in conversations or in real life. You think things are looking up? Okidoke, so what happened to the debt that caused the 2007/8 crisis? Well, personal debt went down a tad (foreclosures), though plastic is all the rage again, bank debt (by far the largest) has been hidden behind a too big to fail wall, and federal debt is on its way out of the ballpark, going going but by no means gone.

But hey, everything seems normal right? Well, unless you’re in Greece, or Italy, or Spain, or Detroit, or you’re in that fast growing American army that just lost your foodstamps and your unemployment benefits. So is it possible that maybe things seem normal for you because they no longer do for other people? If it looks like what it was before, that must be real, right?, that couldn’t be an temporary illusion bought with debt, like getting a new credit card and using it to pay the mortgage and the kids’ school fees and dentist bills till it’s maxed out after a few weeks or months? How many people do you think went routes just like that? And where are they now?

Does anyone think that the debt pays off itself? And even if you do, please note that it hasn’t so far: it’s only grown. How do you think that will end? How could it possibly end?”

Let’s say there are three important kinds of debt: household, financial and federal (national) government. That is, if you allow me to skip over lower level government debt and non-financial business debt for now. Which shouldn’t be ignored, I know, we’ll see a surge in bankruptcies in municipalities and businesses, but let’s look at the three “big ones” today.

Household debt has gone down a little, despite resurgent plastic and soaring student loans. People have a lot less, homes have lost a lot of value, foreclosures have been executed, and what new jobs there are pay much less than those that existed before the crisis (not that I would argue the crisis ever ended, but many do).

Financial sector debt is a whole different story. Both financial institutions and governments (including Fed and other regulators) go through huge troubles to hide financial sector debt from view. It still just lies festering in the vaults, though for quite a few “assets” there’s been a change of vaults: from private banks to public coffers like the Fed. It’s been so ridiculous for so long that we’ve lost track and sight of it, but it’s still true: the most important factor in causing the 2007/8 crisis is still completely hidden from scrutiny. That fact alone should make you very weary: if there were no very large problems with all these smelly assets, they would have been hauled out into the open, and long ago.

A point I have belabored ad nauseum. Just so you know I’m not a lone fool on the hill in this, Zero Hedge had a piece recently on the topic, from Phoenix Capital Research:

To This Day, No One Knows What Financial Firms Are Sitting on

As powerful as it may be, the Fed is not the market. And since the Fed failed to restore trust in the system by forcing all bad debts to light, the financial world has grown increasingly volatile and broken as investors grow increasingly distrustful of the system and begin to pull their money from it: see market volumes continuing to plunge.[..]

That lack of trust continues to this day. In the post-Lehman collapse, instead of forcing real derivative and credit risk out into the open, the Federal Reserve and regulators instead suspended accounting standards and allowed financial firms (and other corporate entities) to continue to lie about the true state of their balance sheets. As a result of this, the financial sector remains rife with fraud and impossible to accurately value (how can you value a business that is lying about its balance sheet?).

Those times in which a company was forced to value its assets at market prices have always seen said values losing 80%+ value in short order: consider Washington Mutual, which sported a book value north of $70 billion right up until it was sold for… $2 billion. This type of fraud is endemic in the system. Indeed, we got a taste of just how problematic a lack of transparency can be with MF Global’s bankruptcy, in which a firm with $42 billion in assets lost over 80% of its value since August only to reveal in bankruptcy that it had stolen over $700 million worth of clients’ money.

That MF Global engaged in fraud and stole clients’ money is noteworthy. However, the far more important issue is: HOW did this company receive primary dealer status from the NY Fed nine months before imploding? The Primary Dealers are the banks that actively engage in day to day activities with the New York Fed regarding the Fed’s monetary policies. Primary Dealers also participate in US Treasury auctions.

Put another way, Primary Dealers are the most elite, well-connected financial firms in the world. They have unequal access to both the Fed and the US Treasury Dept. In order for MF Global to have attained this status it must have passed through a review by: 1) The New York Fed and 2) The SEC. [..] This is not a quick nor superficial process. MF Global passed through all of these reviews to became a primary dealer in February 2011. A mere nine months later, the firm is in Chapter 11 and has admitted to stealing clients’ funds to maintain liquidity.

These developments reveal, beyond any doubt, that financial oversight in the US is virtually non-existent. This returns to my primary point: that trust has been lost in the system. And until it is restored, the system will remain broken.

A final note on this: the NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt? If the NY Fed cannot accurately audit a financial firm’s risks during a six month review, then there is NO WAY an ordinary investor can do so.

This is one of the biggest risks in the system: that no one has a clue what financial entities are sitting on in terms of garbage derivatives and debts. As MF Global proved, this risk can result in a TOTAL loss of funds.

So, financial sector debt? Nobody knows but the people with the legal and political power to hide it away, and slowly transfer it to the public. When you’ve seen numbers like $1 quadrillion for the derivatives trade, it’s hard not be very afraid about how it will all end, but we apparently prefer temporary rosy illusions to being afraid. After all, who talks about derivatives these days?

But, as bad as it may be, we don’t even need to scrutinize financial sector debt to get an idea of what we’re in for. Government debt will do that for us.

As we know, US federal debt is now over $17 trillion, and growing fast:

While the Fed balance sheet has surged to $4 trillion:

In that context, Mish wrote a piece over the weekend on the interest America pays on its debt:

When Will Interest on US National Debt Exceed $1 Trillion?

Really think the Fed is going to hike? They know they can’t, and the Fed is disingenuous as to why.

A year ago the Fed was discussing 6.5% as a trigger point. In December, the Wall Street Journal noted the “Fed’s Shifting Unemployment Guideposts”. Now, in the wake of a massive collapse in the labor force in which unemployment rate just dropped to 6.7% it’s easy to understand why the goalposts shifted.

The Fed pretends its interest rate policy is about a dual mandate of jobs and GDP growth. The above charts show the real reason for the shift: the Fed is in a box of its own making and it has no freaking idea how to get out of the box.

Mish also quotes Peter Tanous in his piece, who says 2012 total income tax revenues for the US government were $1.1 trillion. So the real question becomes: when will interest on the debt be more than income tax revenue? How far away can that moment be? The Fed may not hike, but the Fed is not the market. And what will happen when the moment comes that all tax revenue goes to interest payments? Raise the debt ceiling, no doubt. But that must surely stop when the interest on the debt overpowers income tax revenue.

This interest thing made me think back of a graph I published some time ago, from Zero Hedge. It’s also about interest. In this case, the interest lost to savers through the ZIRP policy. Chris Turner calculated there that American savers lost $10.8 trillion over 12 years, when compared to average interest rates over a 50-year period.

That’s another trillion a year, on top of the threat of a fast rising interest rate on government debt. Better start working real hard, guys. $2 trillion is $6000 per capita per year that you need to cough up. Of course you can argue that rising interest rates would be good for savers, so those numbers are not entirely correct, but America’s a nation of debtors, not savers, and rising interest rates will hit for instance the housing sector like a sledgehammer. By the time this becomes reality, you’re going to wish you were losing savings only.

For a global picture, let’s return to an article I wrote in July 2013, with help from quotes sent by my friend VK:

Oil and Credit

Credit growth precedes GDP growth. In the 2002-2011 period world credit growth has been close to 12% per annum & GDP growth at 4% (11.7% vs 3.6% actually as per Hayman Capital Research ). Total global debt (public & private) is about $210 trillion today. And global GDP is $65 trillion. If you project the trends forward, total global debt will be $635 trillion in a decade! Global GDP will be $96 trillion, i.e. total global Debt-to-GDP of over 650% in 10 years.

Key point, for the next decade to equal the last one: to achieve global growth someone needs to borrow $425 trillion over the next decade. US total debt must rise to $166 trillion by 2023 & EU total debt must rise to $195 trillion. In the next 6 years more money must be lent out than in all the previous thousands of years of human history combined!! [..] Assuming US Treasury yields rise to 5% and thus assuming the global average interest rate is 7%, total debt repayment will be $26.5 trillion roughly annually.

It gets surreal pretty fast, doesn’t it? But it’s really just projecting recent trends into the near future, no more, no less. 12% annual credit (aka debt) growth is how the story of stock market records and rising home prices is kept alive. In the US, in Japan, in Europe.

And if you think the US is bad, look at the story Tyler Durden had on China:

… while the Fed creates $1 trillion in reserves each year, and dropping post taper, China is responsible for $3.6 trillion in loan creation annually – yank that and it’s game over for a world in which “growth” is not more than debt creation.

Applying a realistic, not made up bad debt percentage, somewhere in the 10% ballpark, and one gets a total bad debt number for China of… $2.5 trillion, and rising at a pace of $400 billion per year. No, really. Good luck.

I would think 10% is a very low bad debt percentage for China and its economy effectively controlled by a shadow banking system to a rapidly increasing extent. That’s like saying only 10% of US bank assets were bad in 2007. But the gist of this is obvious: China is a huge credit bomb, rivaling the US in that aspect too.

What’s more, there is a side to credit that is not often mentioned, but is absolutely essential. Credit can be a good thing, provided it is used for constructive purposes (and I don’t mean the construction of ghost cities). In the US, the days when that applied are long gone, and credit is a burden only (except for building illusions), because it’s heaped upon this incredible pile of already existing debt. China, though only for a fleeting moment, has it somewhat better in this regard.

The data leave little room for doubt. I think everyone can understand the principle behind this graph:

Debt aka credit can stimulate productivity, but not indefinitely, and absolutely not when it’s piled upon an existing mountain of debt. Credit overshoots productivity, and keeps rising while the latter is on its way down. Until it no longer can. It’s real simple. We all get it instinctively.

Where the US is in this process becomes clear in this pretty familiar graph:

Which can also be expressed this way:

By 2015, an increase in debt in the US will no longer produce any growth at all. Then it’s all just pushing on a string. Or game over, or whatever you want to call it, pick a flavor of your taste. And then? What then? VK had a nice comment on that as well, especially when combined with Durden’s graph above:

Credit growth in China was 5.9x faster than GDP growth in Q1 2013. 17 cents GDP gain for every dollar borrowed! They’re approaching the US and Europe.

Dollar for dollar, or cent for cent rather, China is where the US was just 10 years ago … As I said, that last graph is pretty familiar, and while it’s not cast in stone, you can bet it serves as a flashing beacon for many people. But most are going to sail the boat anyway, thinking they’ll be smart enough to jump off before it hits the Victoria Falls. They can’t help themselves. The smarter ones have been saying their goodbyes for a while now.

There are a few major, and inevitable, events we’re approaching: US (and EU, and Japan) debt payments that become larger than total income tax revenues, and marginal productivity of debt sinking below zero for real. If you think the most important signals coming out of the economy are stock market records and rising home prices, I would urge you to think again. As for China, all we can do is wait. And perhaps pray, if that’s your thing. Take your pick of inflection points there, how could you go wrong?

But remember, always, when you read anything at all about the economy, ask yourself: “what about the debt”? If something, anything, that happens or is decided, certainly in the west, means more debt is piled on, beware.

This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!