Feb 122018
 
 February 12, 2018  Posted by at 10:46 am Finance Tagged with: , , , , , , , , , , ,  


Camille Corot The Burning of Sodom (formerly “The Destruction of Sodom”) 1843 and 1857

 

Rising Debt + Rising Rates (Northman)
Last Week’s ‘Volocaust’ “Just An Appetizer” – Cole (ZH)
Why People Who Make Money Are Usually Wrong – Taleb (ZH)
‘Big Shakeout Coming’: Bridgewater Sounds Warning (G.)
History Suggests The Correction Isn’t Nearly Over (MW)
Interest Rate Rise Would Hit Millions In UK Who Depend On Cheap Credit (G.)
May Starts Drive to End the Conservative Civil War Over Brexit (BBG)
China Enters The Graveyard Of Empires (Escobar)
China Pledges ‘Employment First’ Policies To Create Millions Of Jobs (R.)
Party On, Dudes (Jim Kunstler)
Oxfam Faces Losing Funding As Crisis Grows Over Abuse Claims (G.)
Oxfam Reels From Prostitution Scandal (G.)
The UK’s Hidden Role In Assange’s Detention (Cook)

 

 

Ultra low rates but ultra high payments.

Rising Debt + Rising Rates (Northman)

“Interest On The Debt Will Be The Fastest Growing Part Of The Federal Budget…By Far. Forget Medicare, Social Security and the Pentagon: $1 trillion-plus deficits means massive increases in the national debt and that debt will have to be borrowed at higher interest rates. Add the need for the Treasury to roll-over existing debt at higher and higher rates and you get an immediate increase in the amount the U.S. will need to spend on interest each year.” Watch this space:

Some people may argue that tax cuts will bring in so much economic growth it will all pay for itself. There is precisely zero evidence for such an assertion:

If you know your tax cut history you know where in the chart above major tax cuts were passed. The debt continued to rise and will continue to rise as spending continues to be expanded. But here’s the kicker: Never in modern times have we seen tax cuts being implemented and spending increased with debt to GDP north of 100%:

Many corporations are drowning in debt, as are consumers, and so are their interest payments:

People invariably argue and say: Yea well, but as a percent of disposable income it’s not so bad. Yes, it’s called artificial low rates, they can mask a lot, but what is currently the situation is not the point, it’s sustainability of debt loads in the very immediate future. As you saw in the above data we are already seeing a vast increase in interest payments despite rates having barely moved off of the historic zero bound line. “As for total debt, the CBO last predicted borrowings of $25.5 trillion by 2027. According to Riedl, the tax cuts, new discretionary outlays and additional interest on the extra spending could add $5 trillion to that number, bringing the total of $30 trillion. That’s 107% of the national income estimate projected by the CBO.

The scariest unknown is what happens to interest expense. At $25.5 trillion, the CBO forecasts outlays for interest of $818 billion in 2027. Going to $30 trillion will raise the load to over $1 trillion. One dollar in seven in spending would be going to interest, versus one in 15 today. And that scenario assumes that the yield on the 10-year Treasury increases to just 3.5% over the next decade, far below its historic average. “If rates go to their average in the 1990s,” warns Riedl, “the deficit will go not to $2 trillion, but to between $2.5 and $3 trillion.”

Read more …

“..the VIX ETPs are only 5 billion dollars. You have 1.5 trillion of implicit short-volatility strategies..”

Last Week’s ‘Volocaust’ “Just An Appetizer” – Cole (ZH)

While Cole is happy to accept the back-patting and congratulations for having foretold in near-perfect detail the dynamics that would drive this week’s volatility explosion, those who read our piece summarizing Cole’s (uncannily well-timed) interview two weeks ago will remember that short-vol ETPs like XIV represent only a fraction of the collective $2 trillion short-gamma position that touches nearly every corner of the market. Other components of what calls the ‘implicit’ gamma short – which we’ve touched on this week – include $600 billion invested in risk-parity strategies, $400 billion in volatility-control funds. And $250 billion of risk premium strategies… Rather than buy the dip, Cole ominously warned that it’s more likely this is the beginning of a much larger selloff. Or, as Kevin Spacey’s character put it in the movie “Margin Call”, because of vulnerabilities related to the market’s massively short gamma positioning, “there will be turmoil in the markets for the foreseeable future.”

Everyone talks – congratulations about calling this. Well, I don’t think what I’ve really talked about has come to pass yet. The VIX ETPs are the smallest portion of the global short-vol trade. Talk about this idea of about 1.5 to 2 trillion dollars’ worth of short-vol exposure, both explicit and implicit. Explicit short volatility are VIX exchange-rated products and vol overwriting funds. You know, the VIX ETPs are only 5 billion dollars. You have 1.5 trillion of implicit short-volatility strategies, strategies that may not be directly shorting options, but use financial engineering to mimic the components of a short-option portfolio. About 1.5 trillion dollars’ worth of these, of exposure, this is what we’re seeing come online now.

This is the real risk. So stocks and bonds sell off together. You have disorderly unwind withdrawal of liquidity. And then, all of a sudden, increasing volatility results in a quick deleveraging of these implicit short-volatility strategies. And this will drive the next leg of the crisis. So, people say congratulations, you called the short-vol trade. No, nothing has happened yet. This is an appetizer. This is just the appetizer for the unwind that is about to come. I think this is what people should be really afraid of, and I think this is the next leg of this that we will see. Whether this happens in two weeks or whether this happens over two years, I don’t know. But I strongly believe this will come to pass. And it will be quite disorderly and ugly.

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Practice and theory.

Why People Who Make Money Are Usually Wrong – Taleb (ZH)

Echoing Mark Spitznagel’s insights into how ‘naiveté’ led to the epic losses experienced by many ‘nickel-picker-uppers’ this week in the short-vol game, Nassim Taleb takes to YouTube to provide some more color on the fallacy of forecasting and what destroyed XIV traders. Taleb begins by noting that “many people attempted to profit by forecasting volatility [would drop] and from the fact that the contract [in this case XIV] was poorly constructed… they were right, until they were destroyed.” Academics cannot get the idea that you don’t have to be right about the world to make money.

“Antifragile explains why understanding x is different from f(x) the payoff or exposure from x. Most of the harm/gains come from f(x) being convex or concave, not from understanding x. Forecasting is off an average, and average is for academics and other morons.” As Valuewalk’s Jacob Wolinsky writes, this video illustrates the point with XIV that went bust while being correct about volatility –and why people who make money are usually wrong.

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Has Pandora’s box been opened?

‘Big Shakeout Coming’: Bridgewater Sounds Warning (G.)

Financial markets are braced for more volatility this week amid predictions from the world’s biggest hedge fund that a “big shakeout” is coming. The Australian stock market was the first to test the water on Monday morning and one point was down 0.7%. But it rallied slightly in afternoon trade to close down 0.3%. Bourses elsewhere in Asia Pacific also found calmer waters. South Korea’s Kospi was up 0.9% while Hong Kong put on 0.8%. The Nikkei in Japan was closed for a holiday. The FTSE100 is London is due to open up 1.25% according to futures trading, while the Dow Jones average on Wall Street is set to rise 0.7%. Last week saw $4tn wiped off the value of shares around the world and the US market entered into an official correction after falling more than 10% from its record level in January.

Wall Street staged a late rally on Friday as the Dow Jones finished 330 points higher and the closely watched Vix index, or “fear index”, has dropped four points to 29 on Monday from 33 on Friday. But Bob Prince, co-chief investment officer at the $160bn US hedge fund Bridgewater, told the Financial Times on Monday (paywall): “There had been a lot of complacency built up in markets over a long time, so we don’t think this shakeout will be over in a matter of days. “We’ll probably have a much bigger shakeout coming.” David Bassanese, the chief economist at BetaShares Capital in Sydney, said in a note on Sunday that despite the big falls last week, the selling could continue. “History suggests the depth of corrections – assuming the underlying bull market persists – don’t usually get beyond 15%, so there’s certainly some scope for market weakness before a bottom is reached,” he said.

Investors would be jittery about US inflation figures on Wednesday, he said. The market was forecasting a “fairly benign” 1.7% annual prices growth, but anything above that was likely to result in more stock losses. Chris Weston at online trader IG said on Monday: “A massive buildup in market leverage has been partially unwound in the blink of an eye and what started as systematic funds selling out of equity and futures positions, as implied volatility headed higher, has morphed into something far more broad-based incorporating many other market participants.”

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“..the median decline for the S&P in a correction is 16.4%, and the median length of a pullback is 64 days..”

History Suggests The Correction Isn’t Nearly Over (MW)

Perhaps the biggest question on Wall Street right now is whether the recent pain in the U.S. stock market is over. If history is any indication, the answer is no. Both the Dow Jones Industrial Average and the S&P 500 entered correction territory on Thursday, defined as a 10% drop from a recent peak—in this case, record highs that were hit in late January. According to Bespoke Investment Group, which analyzed the 95 corrections the S&P has seen since 1928, investors might want to brace themselves for more pain.

Per Bespoke’s data, the median decline for the S&P in a correction is 16.4%, and the median length of a pullback is 64 days. Were the S&P to hit that median in the current selloff, it would bottom around 2,400, or roughly 7.8% below current levels. “Keep in mind, though, that these are median levels. There have been a number of corrections (13) that saw declines of less than 11%, while several saw deeper declines of more than 20%,” the research group wrote in a blog post. A decline of 20% would put the index into bear-market territory, where nearly one-fifth of S&P components currently trade. “In terms of length, prior corrections have also been all over the map. Some have lasted as little as three days, while others have stretched on for well over a year.”

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It will hit millions everywhere.

Interest Rate Rise Would Hit Millions In UK Who Depend On Cheap Credit (G.)

The Bank of England’s warning that it plans to raise interest rates from as early as May will hit millions of low-income families who have only survived financially for a decade by using cheap credit. The Resolution Foundation said almost half of low-income families were in debt distress before Threadneedle Street said last week that it needed to increase the base rate at an accelerated pace over the next two years. The Bank governor, Mark Carney, said the strength of the economy warranted higher borrowing costs. He cited rising average wages and resilient GDP growth as reasons to begin pushing interest rates from the historically low level of 0.5%.

But a study by the foundation showed the proportion of households in some form of debt distress rose to 45% among the poorest fifth of working age households, with more than a third experiencing difficulty in paying for accommodation and one in six in arrears on either their mortgage or consumer debts. Households headed by someone aged 25-34 spent nearly £1 in every £5 of their pre-tax income on debt repayments in 2017, compared with 20p for households aged 65 and over. Levels of consumer credit have soared in recent years to more than £200bn, prompting debt charities to warn that lenders are repeating the mistakes made in the early part of the century, when households on low incomes were sold loans they could not repay.

Matt Whittaker, the chief economist at the Resolution Foundation, said most of the increase in consumer debt since 2014 was among middle and higher income groups and they could afford to absorb an increase in interest rates. The cost of servicing Britain’s household debt is low by historical standards, he said, with repayments accounting for 7.7% of disposable income, well below the 12.3% recorded just before the financial crisis, and in line with the level seen during the mid-1990s and early 2000s. “However, while the recent growth in debt is less of a concern, it is very worrying that almost half of low-income families are already showing signs of debt distress,” Whittaker said. “While rates have been at historic lows for a decade now, many families have experienced a tight income squeeze over this period and have not been able to get back on the front foot when it comes to servicing their debts.”

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Yawn.

May Starts Drive to End the Conservative Civil War Over Brexit (BBG)

U.K. Prime Minister Theresa May embarks this week on a determined push to bring her divided Cabinet together and come up with a Brexit plan. As European negotiators show increasing signs of impatience, senior U.K. ministers are preparing to deliver a series of speeches in the coming weeks setting out a vision of life outside the European Union. They’ll culminate with an address by May. Dubbed a “Road Map to Brexit,” the schedule begins on Wednesday when Foreign Secretary Boris Johnson issues an appeal to both sides of the Brexit debate. May is expected to offer a new security relationship three days later when she addresses a conference in Munich. Also scheduled to make speeches are Brexit Secretary David Davis, Trade Secretary Liam Fox, and Cabinet Office Minister David Lidington.

Absent, however, is Chancellor of the Exchequer Philip Hammond, who enraged Brexit supporters in January by suggesting Britain would see only “very modest” changes to its relationship with the EU once it leaves the bloc. May has ordered key ministers to attend an “away day” at Chequers, the prime ministerial country retreat outside London, after two meetings to find a joint position on Brexit ended without agreement last week. With just 13 months to go before Britain exits the EU, the ruling Conservatives are mired in a civil war between those who want to retain close ties to the bloc and hard-liners demanding a clean break, including total withdrawal from the EU single market and the customs union. On Friday, Michel Barnier, the EU’s chief Brexit negotiator, expressed his exasperation by warning that the post-Brexit bridging period that once seemed a certainty “is not a given,” prompting investors to sell the pound.

Businesses have said they’ll start to activate contingency plans to move jobs and operations out of the U.K. unless a transition deal is nailed down by the end of March. In her speech to cap off the “Road to Brexit” push — the date of which hasn’t been announced — May will set out the government’s “ambitions for Britain’s partnership with the EU after we have left.” It will be her third major address, following her Lancaster House speech in January last year and her Florence speech in September. “Brexit is a defining moment in the history of our nation,” May’s office said in a statement. “We will be forging an ambitious new partnership with Europe and charting our own way in the world to become a truly global, free-trading nation.”

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Afghanistan is like a Bermuda triangle.

China Enters The Graveyard Of Empires (Escobar)

The latest plot twist in the endless historical saga of Afghanistan as a graveyard of empires has thrown up an intriguing new chapter. For the past two months, Beijing and Kabul have been discussing the possibility of setting up a military base alongside Afghanistan’s border with China. “We are going to build it [the base] and the Chinese government has committed to help financially, provide equipment and train Afghan soldiers,” Mohammad Radmanesh, a spokesman for the Afghan Ministry of Defense, admitted to the AFP. On the record, the Chinese Foreign Ministry only admitted that Beijing was involved in “capacity-building” in Afghanistan, while NATO’s Resolute Support Mission, led by the United States, basically issued a “no comment.”

The military base will eventually be built in the mountainous Wakhan Corridor, a narrow strip of territory in northeastern Afghanistan that extends to China and separates Tajikistan from Pakistan. It is one of the most spectacular, barren and remote stretches of Central Asia and according to local Kyrgyz nomads, joint Afghan-Chinese patrols are already active there. True to Sydney Wignall’s fabled Spy on the Roof of the World ethos, a great deal of shadow play is in effect. Apparently, this is basically about China’s own war on terror. Beijing’s strategic priority is to prevent Uyghur fighters of the East Turkestan Islamic Movement (ETIM), who have been exiled in Afghanistan, crossing the Wakhan Corridor to carry out operations across Xinjiang, an autonomous territory in northwest China.

There is also the fear that ISIS or Daesh jihadis from Syria and Iraq may also use Afghanistan as a springboard to reach the country. Even though the jihad galaxy may be split, Beijing is concerned about ETIM. As early as September 2013, the capo of historic al-Qaeda, Ayman al-Zawahiri, supported jihad against China in Xinjiang. Later, in July 2014, Abu Bakr Al-Baghdadi, the leader of Daesh said: “Muslim rights [should be] forcibly seized in China, India and Palestine.” Then, on March 1, 2017, Daesh released a video announcing its presence in Afghanistan, with the terror group’s Uyghur jihadis vowing, on the record, to “shed blood like rivers” in Xinjiang. At the heart of the matter is China’s Belt and Road Initiative, or the New Silk Road, which will connect China with Asia, Africa, the Middle East and Europe.

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Empty politics.

China Pledges ‘Employment First’ Policies To Create Millions Of Jobs (R.)

China will boost its job creation effort and promote entrepreneurship this year, a spokeswoman for the top state planner said on Sunday, under pressure to find work for millions of unemployed people and new college graduates. Meng Wei of the National Development and Reform Commission (NDRC) said China needs to create jobs for 9.7 million people registered as unemployed and 8.2 million new college graduates, as well as workers affected by industrial capacity cuts. China’s urban-registered unemployment rate fell to 3.9 percent last year and has remained generally stable despite slowing economic growth and the government forging ahead with plans to cut back industrial capacity.

Many analysts say, however, that the official data is an unreliable indicator of employment conditions because it only measures employment in urban areas and does not take into account the millions of migrant workers who form the bedrock of China’s labour force. “We will implement an employment-first strategy and more proactive employment policies…and vigorously promote employment and entrepreneurship,” Meng told a news conference on Sunday, adding that protecting jobs was fundamental to China’s stable growth policy. Authorities are counting on “new growth engines” such as technology and services to support job creation. Meng said China will create a policy environment that supports the digital economy and will promote the big data, artificial intelligence and industrial internet sectors.

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QE bankrolls the house.

Party On, Dudes (Jim Kunstler)

In June of 2008, US crude hit $144-a-barrel, a figure so harsh that it crippled economic activity — since just about everything we do depends on oil for making, enabling, and transporting stuff. The price and supply of oil became so problematic after the year 2000 that the US had to desperately engineer a work-around to keep this hyper-complex society operating. The “solution” was debt. If you can’t afford to run your society, then try borrowing from the future to keep your mojo working. The shale oil industry was a prime beneficiary of this new hyper-debt regime. The orgy of borrowing was primed by Federal Reserve “creation” of trillions of dollars of “capital” out of thin air (QE), along with supernaturally low interest rates on the borrowed money (ZIRP). The oil companies were desperate in 2008. They were, after all, in the business of producing… oil! (Duh….) — even if a giant company like BP pretended for a while that its initials stood for “Beyond Petroleum.”

The discovery of new oil had been heading down remorselessly for decades, to the point that the world was fatally short of replacing the oil it used every year with new supply. The last significant big fields — Alaska, the North Sea, and Siberia — had been discovered in the 1960s and we knew for sure that the first two were well past their peaks in the early 2000s. By 2005, most of the theoretically producible new oil was in places that were difficult and ultra-expensive to drill in: deep water, for instance, where you need a giant platform costing hundreds of millions of dollars, not to mention armies of highly skilled (highly paid) technicians, plus helicopters to service the rigs. The financial risk (for instance, of drilling a “dry hole”) was matched by the environmental risk of a blowout, which is exactly what happened to BP’s 2010 Deepwater Horizon platform in the Gulf of Mexico, with clean-up costs estimated at $61 billion.

[..] The shale oil companies could get plenty of cash-flow going, but it all went to servicing their bonds or other “innovative” financing schemes, and for many of the companies the cash flow wasn’t even covering those costs. It cost at least six million dollars for each shale well, and it was in the nature of shale oil that the wells depleted so quickly that after Year Three they were pretty much done. But it was something to do, at least, if you were an oil company — an alternative to 1) doing no business at all, or 2) getting into some other line-of-work, like making yoga pants or gluten-free cupcakes.

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“..87 allegations of sexual abuse by staff in 2016-17..” “..more than 120 workers across a range of leading charities had been accused of sexual abuse in the past year alone..”

Oxfam Faces Losing Funding As Crisis Grows Over Abuse Claims (G.)

Oxfam was scrambling on Sunday night to contain a growing crisis over claims of sexual misconduct by aid workers before a crunch meeting on Monday that could see the charity stripped of its government funding. Amid anger from the government and the wider aid sector at revelations that Oxfam staff in Haiti paid prostitutes – possibly underage – for sex in 2011, the charity’s chair of trustees, Caroline Thomson, pledged to widen a review of its practices to include the Haiti allegations and admitted “anger and shame that behaviour like that … happened in our organisation”. She set out the steps Oxfam would take to avoid a similar scandal in future after the international development secretary, Penny Mordaunt, issued a damning rebuke to the charity. Mordaunt warned that it would receive no more public money unless it demonstrated “moral leadership” and handed over all information on aid workers’ alleged use of prostitutes on the island.

[..] Oxfam’s fight to secure its financial footing came after days of escalating stories about the conduct of its workers after revelations that staff in Haiti had been dismissed for using prostitutes for sex parties. Any hopes the charity’s leadership had that the scandal might quickly subside were dashed when it was reported in the Observer that Oxfam staff in Chad had also used prostitutes and when Oxfam’s own annual report resurfaced, showing it dealt with 87 allegations of sexual abuse by staff in 2016-17. Oxfam’s crisis threatened to spill across the charity sector on Sunday with reports that more than 120 workers across a range of leading charities had been accused of sexual abuse in the past year alone.

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Everyone in Haiti knew about this. And it’s not just Oxfam either.

Oxfam Reels From Prostitution Scandal (G.)

deep disgust at what they were hearing was tinged with a sense of inevitability for some. “We’ve all worked with people who’ve worked in Ethiopia, DRC, Haiti, Malawi, Thailand etc who’ve seen similar things across the entire sector,” said one Oxfam worker in the Middle East. Goldring, admired by staff as “deeply thoughtful”, set out the story – first a chronology of what happened in Haiti in 2011, and then a commentary on the issues it raised, including pointing out the dilemmas that the Oxfam staff handling the case faced. For example, he said, the charity didn’t report it to the Haitian police because it was concerned that could rebound adversely on the women involved.

He struck one attendee as “desperately keen to put across the point that we don’t think there was a cover-up because we didn’t hide that there was a problem in Haiti”. Only Oxfam hadn’t been open about what that problem was. Some staff also felt there was a “single-mindedness about the attack on Oxfam” that was not commensurate with the weight of what had happened in 2011. It was shocking and wrong, but some felt that the problems revealed were probably not unique to Oxfam. “I’m really frustrated at the Oxfam-only lens in this – granted what happened was horrific,” said one Oxfam worker abroad. “I’ve worked for [several other NGOs] and there just isn’t any type of policy or procedure in place for any of this stuff.”

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The people responsible for these decisions should be taken to court. Even -make that especially- politicians must be held to their own laws.

The UK’s Hidden Role In Assange’s Detention (Cook)

It now emerges that the last four years of Julian Assange’s effective imprisonment in the Ecuadorean embassy in London have been entirely unnecessary. In fact, they depended on a legal charade. Behind the scenes, Sweden wanted to drop the extradition case against Assange back in 2013. Why was this not made public? Because Britain persuaded Sweden to pretend that they still wished to pursue the case. In other words, for more than four years Assange has been holed up in a tiny room, policed at great cost to British taxpayers, not because of any allegations in Sweden but because the British authorities wanted him to remain there. On what possible grounds could that be, one has to wonder? Might it have something to do with his work as the head of Wikileaks, publishing information from whistleblowers that has severely embarrassed the United States and the UK.

In fact, Assange should have walked free years ago if this was really about an investigation – a sham one at that – into an alleged sexual assault in Sweden. Instead, as Assange has long warned, there is a very different agenda at work: efforts to extradite him onwards to the US, where he could be locked away for good. That was why UN experts argued two years ago that he was being “arbitrarily detained” – for political crimes – not unlike the situation of dissidents we support in other parts of the world. According to a new release of emails between officials, the Swedish director of public prosecutions, Marianne Ny, wrote to Britain’s Crown Prosecution Service on 18 October 2013, warning that Swedish law would not allow the case to be continued. This was, remember, after Sweden had repeatedly failed to take up an offer from Assange to interview him at the embassy in London, as had happened in 44 other cases between Sweden and Britain.

Ny wrote to the CPS: “We have found us to be obliged to lift the detention order … and to withdraw the European arrest warrant. If so this should be done in a couple of weeks. This would affect not only us but you too in a significant way.” Three days later, suggesting that legal concerns were far from anyone’s mind, she emailed the CPS again: “I am sorry this came as a [bad] surprise… I hope I didn’t ruin your weekend.” In a similar vein, proving that this was about politics, not the law, the chief CPS lawyer handling the case in the UK, had earlier written to the Swedish prosecutors: “Don’t you dare get cold feet!!!”

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Jan 232018
 
 January 23, 2018  Posted by at 10:56 am Finance Tagged with: , , , , , , , , , , , ,  


William Claxton John Coltrane at the Guggenheim Museum, New York 1960

 

Trump Makes First Big Trade Move With Tariffs Aimed At Asia (BBG)
The Shutdown Scam: The GOP Is Now The Second “Government Party” (Stockman)
Blow Back (Jim Kunstler)
IMF Raises Global Growth Forecast, Sees Trump Tax Boost (R.)
IMF: Next Recession Will Come Sooner And Will Be Harder To Fight (EuA)
Rising Interest Payments Matter (NMT)
UK Business Leaders Push For New Campaign To Reverse Brexit (G.)
Kim Dotcom Sues New Zealand Government For Billions in Damages (BBC)
Ecuador’s Correa ‘Afraid for Julian Assange’s Safety’ (TeleSur)
Australia Sends Dozens Of Refugees From Pacific Camps To US (AFP)
Angela Merkel Has Completely Reversed Her Refugee Policies (Spiegel)

 

 

Make your own solar panels. What’s wrong with that?

Trump Makes First Big Trade Move With Tariffs Aimed At Asia (BBG)

President Donald Trump imposed tariffs on imported solar panels and washing machines, in his first major move to level a global playing field he says is tilted against American companies. The U.S. will impose new duties of as much as 30 percent on foreign-made solar equipment, the U.S. Trade Representative’s office said Monday. The president also approved tariffs starting as high as 50 percent on imported washing machines. Chinese and South Korean officials condemned the move, analysts said it could backfire, while markets largely shrugged it off. The tariffs were announced as Trump prepares to travel to the World Economic Forum in Davos, Switzerland, where the international business and political elite gather to mull the current state of the global order.

While the measures may sharpen the president’s “America First” policy after months of rhetoric and herald a hotter trade conflict with China, in Asia manufacturers and investors said the reality wasn’t as bad as they had feared. Investors “are used to bluff from Trump, which often turns out to be a non-event,” said Qiu Zhicheng at ICBC International Research in Hong Kong. “As long as the situation doesn’t escalate into a full-scale trade war, the market impact will be limited. We believe the two economies will stay rational, as a trade war would hurt both.” LG Electronics, a maker of domestic appliances, and South Korean solar panel makers fell initially in Seoul trading on the news before recovering. Samsung said the tariff on washing machines is a “great loss” for U.S. workers and consumers.

South Korea’s trade minister said Tuesday that his nation will file a petition with the World Trade Organization against the U.S. for imposing anti-dumping duties on Korean washing machine and solar panel makers. The U.S. decision is “excessive,” Kim Hyun-chong said. China exported more than 21 million washing machines worth just under 19 billion yuan ($2.9 billion) globally from January through November 2017, according to customs data. China is also the world’s largest exporter of solar panels.

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David knows his shutdowns.

The Shutdown Scam: The GOP Is Now The Second “Government Party” (Stockman)

Nowadays, government “shutdowns” are obviously not all that, and we do claim some expertise on the topic. Since 1975 there have been 14 shutdowns and we have had the privilege of being on-hand up close and personnel during 11 of these. Five shutdowns occurred while your editor was a member of the US House (1977-1981) and another six during his stint as director of OMB. The idea back then, needless to say, was that shutdowns came about mainly when anti-spenders refused to capitulate to the incessant demands of the swamp creatures for more appropriations, pork and graft.

[..] What is really happening, of course, is that the Trumpite/GOP is proving in spades that America is now saddled with two pro-government parties. This means a good shutdown is going to waste and that there is no stopping the fiscal doomsday machine that is now racing toward a national calamity, unimpeded. After all, the reason Washington is operating on its 3rd CR of the fiscal year and struggled a whole weekend to get a fourth one lasting a mere 16 days, lies in the utter irresponsibility of the Trump GOP approach to fiscal policy.

These clowns want to spend $120 billion on disaster relief without a single dime of off-setting cuts; raise defense by $80 billion when the Pentagon is already a $620 billion swamp of waste; appropriate $33 billion for an utterly idiotic Wall on the Mexican border when the problem could be solved by cancelling the $32 billion per year “War on Drugs” and putting up guest worker sign-up booths along the border; and authorizing tens of billions on top of that to pay for the backroom “deals” that were made in order to get the votes for a massive tax bill that not a single Senators or House member had read before it was ram-rodded into law by desperate GOP leaders on Christmas Eve.

So this shutdown is indeed different. Unlike the case back in the day, there is no fiscal red line whatsoever at issue; only a prospective eruption of more red ink and an interim game of political chicken about 700,000 Dreamers, who at the end of the day will not be deported and who will eventually get a path to citizenship. That’s because they, and millions of more immigrants to come, comprise the only available “growth” margin for the US work force in the decades ahead; and therefore constitute the next generation of Tax Mules which will be absolutely necessary to support today’s 50 million retirees. That is, as their population inexorably swells toward 100 million during the next four decades.

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Pressure on the FBI is set to increase tenfold.

Blow Back (Jim Kunstler)

On Sunday, the FBI revealed that it had lost five months of text messages between Trump antagonists Peter Strzok and Lisa Page. The agency offered a lame explanation that “software upgrades” and “misconfiguration issues” interfered with the app that is supposed to automatically save and archive communications between officials on FBI phones. This was the couple who chattered about an FBI-generated “insurance policy” for the outcome of the 2016 election with Deputy Director Andrew McCabe. When will these three be invited to testify before a house or senate committee to inform the nation exactly what the “insurance policy” was?

The bad odor at the FBI seeps into several other areas of misbehavior involving Hillary Clinton, her campaign, the Democratic National Committee (DNC), and members of the permanent Washington bureaucracy. Did the Obama White House use the Christopher Steele dossier, paid for by the Clinton Campaign, to obtain FISA warrants against her opponent in the election for the purpose of conducting electronic surveillance on him? Was the FBI abetting a Democratic Party coup to get rid of Trump by any means necessary once he got into office?

Did the FBI conduct a stupendously half-assed investigation into Hillary Clinton’s private email server by dismissing the charges before interviewing any of the principal characters involved, granting blanket immunities to Obama White House officials, and failing to secure computers that contained evidence? Does the FBI actually know what then Attorney General Loretta Lynch discussed with Bill Clinton in the parked airplane on the Phoenix tarmac? Did the FBI fail to investigate enormous contributions (roughly $150 million) to the Clinton Foundation after the Uranium One deal was signed? Did they look into any of the improprieties surrounding the DNC’s effort to nullify Bernie Sander’s primary campaign?

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Growth is God.

IMF Raises Global Growth Forecast, Sees Trump Tax Boost (R.)

The IMF on Monday revised up its forecast for world economic growth in 2018 and 2019, saying sweeping U.S. tax cuts were likely to boost investment in the world’s largest economy and help its main trading partners. However, the IMF, in an update of its World Economic Outlook, also added that U.S. growth would likely start weakening after 2022 as temporary spending incentives brought about by the tax cuts began to expire.\ The tax cuts would likely widen the U.S. current account deficit, strengthen the U.S. dollar and affect international investment flows, IMF chief economist Maurice Obstfeld said. “Political leaders and policymakers must stay mindful that the current economic momentum reflects a confluence of factors that is unlikely to last for long,” Obstfeld told reporters at the World Economic Forum in Davos.

He said economic gains from the tax cuts would be partially paid back later in the form of lower growth as temporary spending incentives, notably for investment, expired and as rising federal debt took a toll. IMF Managing Director Christine Lagarde pointed to a “troubling” increase in debt levels across many countries and warned policymakers against complacency, saying now was the time to address structural deficiencies in their economies. Obstfeld said a sudden rise in interest rates could lead to questions about the debt sustainability of some countries and lead to a disruptive correction in “elevated” equity prices.

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IMF wants their cake and eat it. They warn against the failure of their own policy recommendations.

IMF: Next Recession Will Come Sooner And Will Be Harder To Fight (EuA)

The global economy is growing faster than expected, fuelling CEO optimism as they arrive this week at the World Economic Forum (WEF) in Davos, Switzerland. But the IMFhas warned that the next crisis will hit sooner and harder that we thought. “In seed time learn, in harvest teach, in winter enjoy,” said IMF Managing Director Christine Lagarde, issuing a warning by quoting British poet William Blake to describe the state of mind of businessmen and politicians in the world. The global economy continues to beat previous forecasts. The Fund revised upward by 0.2% the growth expected for this year and next. In Europe, the IMF increased further its outlook by 0.3% in 2018 (2.2%) and in 2019 (2%). But “complacency is one of the risks we should go against”, Lagarde told reporters in Davos hours before the official opening of the WEF.

The economy is growing but not because countries have lifted their growth potential via investment in human capital or technology. Instead, reforms have been elusive and growth has benefited just the few that are on top of the pile. “We are not satisfied,” Lagarde insisted, because “too many people have been left out of the acceleration of growth”. Against the backdrop of fragile growth and outstanding challenges, including a high level of debt, the Fund’s chief economist, Maurice Obstfeld, stressed that “the next recession will come sooner and will be harder to fight”. He warned political leaders that the economic momentum is due to factors that are “unlikely to last for long”, including the monetary stimulus and supportive fiscal stance. For that reason, he urged countries to adopt measures aimed at improving the resilience of their societies in the fast-changing digital revolution and to improve the inclusiveness of their societies.

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Another huge surge in debt. Insane. But the only way to keep the zombie from dying.

Rising Interest Payments Matter (NMT)

Is anyone paying attention? I don’t know, but the cost of carrying debt has been rising and it’s already showing measurable impacts despite the Fed Funds rate still being very low. My concern of course is that the global debt construct will bring global growth to a screeching halt (see also The Debt Beneath). As the 10 year is already piercing above the 2.6% area now I want to pay attention to the data coming in as the Fed is dot plotting more rate hikes to come. After all the Fed has hiked 5 times off the bottom floor in the past 2 years:

Can we see any measurable impact? You bet we can. Here are personal interest payments for consumers:

Mind you we are still near the lows of the previous cycle and already total interest payments are near record highs. The driver of course is record consumer debt and credit card debt. But despite rates still being historically low this rise in interest rates has an impact on the consumer. Already we see this: “The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion. “People are using their cards to get from pay cheque to pay cheque,” said Charles Peabody, managing director at the Washington-based investment group Compass Point. “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.” Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.”

I repeat: “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.” [..] “Economists with Deutsche Bank expect the extra debt the Treasury must issue to fund President Donald Trump’s tax package and the amount of debt the Federal Reserve plans to redeem at maturity this year will bloat issuance to about $1tn in 2018. That’s up more than 50 per cent from a year earlier and, when coupled with a 30 per cent rise in the amount of corporate debt that’s due to mature, leaves questions of who the eventual buyer will be.“ A good question indeed. That’s a lot of debt issuance:

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2018 will be the year of the Brexit reversal.

UK Business Leaders Push For New Campaign To Reverse Brexit (G.)

Business leaders are privately pushing for a new campaign to reverse Brexit as concerns mount about the viability of government plans to prevent a collapse in exports to Europe. On Monday, the CBI launched its most sustained attack yet on the government’s Brexit strategy by calling for full customs union with the EU and single market participation, even if it means abandoning the pursuit of separate trade deals with the rest of the world. Behind the scenes, senior figures on the CBI policy council are urging the lobby group to toughen its message still further and spell out their belief that this logic should ultimately lead to a national rethink of the decision to leave the EU, perhaps through a second referendum or an election.

While this is not the CBI’s official position, the group says it has decided to speak out about the problems of the government’s approach to Brexit after “thousands of conversations” and workshops with its members over the past two to three months. “It’s not for us to say [whether to reverse Brexit], we are simply pointing out that you need single market access and you need a customs union,” said a spokesman. “If someone concludes that we therefore need to retest this, that’s a political decision, we are just being very practical about it.”

Government ministers reacted furiously to previews of the CBI’s evolving position over the weekend, which now directly challenges the British strategy of leaving the customs union so that new trade deals can be pursued outside a common tariff area. The CBI director general, Carolyn Fairbairn, told an audience at Warwick University on Monday: “There may come a day when the opportunity to fully set independent trade policies outweighs the value of a customs union with the EU; a day when investing in fast-growing economies elsewhere eclipses the value of frictionless trade in Europe. But that day hasn’t yet arrived.”

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The former government, to be exact.

Kim Dotcom Sues New Zealand Government For Billions in Damages (BBC)

Kim Dotcom, the founder of file-sharing site Megaupload, is suing the New Zealand government for billions of dollars in damages over his arrest in 2012. The internet entrepreneur is fighting extradition to the US to stand trial for copyright infringement and fraud. Mr Dotcom says an invalid arrest warrant negated all charges against him. He is seeking damages for destruction to his business and loss of reputation. Accountants calculate that the Megaupload group of companies would be worth $10bn (£7.2bn) today, had it not been shut down during the raid. As he was a 68% shareholder in the business, Mr Dotcom has asked for damages going up to $6.8bn. He is also considering taking similar action against the Hong Kong government.

As stated in documents filed with the High Court, Mr Dotcom is also seeking damages for: • all lost business opportunities since 2012 • his legal costs • loss of investments he made to the mansion he was renting • his lost opportunity to purchase the mansion • loss of reputation. “I cannot be expected to accept all the losses to myself and my family as a result of the action of the New Zealand government,” he told the BBC. “This should never have happened and they should have known better. And because they made a malicious mistake, there is now a damages case to be answered.” New Zealand Prime Minister Jacinda Ardern told Radio New Zealand: “This has obviously been an ongoing matter, so no it doesn’t surprise me.”

Mr Dotcom’s key argument over his extradition is the warrants used for the raid on his mansion and arrest in January 2012 were based on Section 131 of the 1994 Copyright Act of New Zealand. “Under the NZ copyright act, online copyright infringement is not a crime,” said Mr Dotcom. “92B of Section 131 – an amendment created by parliament in 2012 – prohibits any criminal sanction against an internet service provider in New Zealand. “In order for the US to be successful with an extradition, the allegation of the crimes that they are charging someone with also have to be a crime in the country from which they request the extradition.”

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We must find ways to protect Assange et al.

Ecuador’s Correa ‘Afraid for Julian Assange’s Safety’ (TeleSur)

Former Ecuadorean president Rafael Correa has warned that WikiLeaks founder Julian Assange’s days are numbered at the Ecuadorean Embassy in London. Correa, who gave Assange asylum back in 2012, said that he’s “afraid for Julian Assange’s safety” due to the new government´s actions with regards to his case. He said that he believes President Lenin Moreno is likely “take away the support” previously afforded to the anti-secrecy activist. “It will only take pressure from the United States to” withdraw protection for Assange and “surely it’s already being done, and maybe they await the results of the Feb. 4 (referendum) to make a decision,” said Correa, in an article published by AFP.

When asked does he have evidence to support his claim, Correa said it’s clear that Moreno “has no convictions, it’s clear that he has yielded to the usual powerbrokers” and will “soon enough yield regarding the question of Assange.” The 54-year old economist added that the ambassador for the United States was shamelessly interfering in Ecuador’s internal affairs, something “hadn’t occurred during ten years” of his government. Earlier this week Correa officially left the ruling PAIS Alliance, the leftist political movement he founded in 2006 and which he first rose to political prominence. Having referred to Moreno as a “traitor,” someone who has called for an “unconstitutional” referendum that could spell an end to “democracy,” Correa went on to say that “they can rob us of Alianza Pais, but never our will and convictions. Despite the pain, this only strengthens us.”

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In the future, Manus will be compared to Birkenau.

Australia Sends Dozens Of Refugees From Pacific Camps To US (AFP)

Dozens of refugees held for years in Australia’s remote Pacific detention camps departed for resettlement in the United States on Tuesday, asylum-seeker advocates said. The Sydney-based Refugee Action Coalition said 40 men flew out from Papua New Guinea’s capital Port Moresby under a deal struck by Australia with former US president Barack Obama but bitterly criticised by his successor Donald Trump. “It was a bitter-sweet moment for the refugees — who on the one hand, are happy to be gaining the freedom that Australia denied them more than four years ago; but on the other, they remain extremely concerned for those that are being left behind,” the advocacy group said in a statement.

The refugees, from camps on Manus Island, flew to Manila from where they will fly on to the US in different groups in the coming weeks before being resettled across the country, it said. The group released photos showing the refugees lining up before dawn to get on buses for the airport, then waiting at the gate to board their flight to Manila. Another 18 men were due to leave Port Moresby in the coming weeks, it said. [..] Canberra sends asylum-seekers who try to reach Australia by boat to detention camps in Manus and the Pacific island of Nauru under a tough policy designed to choke off the flow of refugees to the country. More than 1,000 still remain in limbo in the remote locations.

Canberra has strongly rejected calls to move the refugees to Australia and instead has tried to resettle them in third countries, including the United States. But until now only about 50 refugees have been sent to the US, under an agreement President Trump attacked after taking office as a “dumb deal”. The Refugee Action Coalition said a further 130 people on Nauru have been accepted by the US and are expected to depart next month.

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Merkel can’t take that she’s yesterday’s news.

Angela Merkel Has Completely Reversed Her Refugee Policies (Spiegel)

It’s no longer about people, it’s about a number. It’s about the number of refugees who come to Germany, not about the refugees themselves. The most recent number is 223,000: That’s how many asylum applications were submitted last year, a far cry from the 746,000 applications received in 2016. The new number is rather convenient for Angela Merkel in that it is extremely close to the upper limit of 220,000 that has found its way into the German chancellor’s preliminary coalition outline agreed to by Merkel’s conservatives and the center-left Social Democrats (SPD). This number is the expression of a political policy that has never been clearly verbalized and never been adequately explained. It is the expression of an about-face on refugee policy, away from open borders and toward harsh rejection.

Late in the summer of 2015, Merkel said that if Germany cannot show “a friendly face” in an emergency, “then it is not my county.” She kept the borders open to the incoming refugees, and much of the world was inspired by her humanitarian approach. Now, however, Germany is presenting a much less friendly face to the world. And the German chancellor has no country anymore. But that doesn’t seem to be bothering her. Indeed, her views would seem to have completely changed. In 2016, Merkel engineered a deal with Turkey on behalf of the European Union which essentially shut down the refugee route across the Aegean Sea from Turkey to Greece. She also agreed to demands from the conservative Christian Social Union (CSU), the Bavarian sister party to her own Christian Democrats (CDU), that an annual upper limit be established, though it isn’t allowed to be called an “upper limit.”

In the future, there is also to be a 1,000-per-month upper limit applied to family reunifications for most refugees. That is too low. The CDU and CSU are fond of emphasizing family values, yet they have joined forces to limit family reunification — even though it should be clear to everyone that men have the best chances at integration if they live here together with their families. But none of that matters anymore. The parties only care that the number is low. And SPD leaders are going along without complaint. That, too, is a disappointment.

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May 062015
 
 May 6, 2015  Posted by at 11:22 am Finance Tagged with: , , , , , ,  


NPC Graf Zeppelin over Capitol 1928

In its German language edition, Der Spiegel ran a piece last night (translation is mine) about a proposal from the German Green Party (Die Grünen) to deal with the Greek debt crisis that is radically different from how its own government has so far approached the situation. The Greens are not in the Berlin government, but they are a force in German politics regardless, if only because the country loves so much to portray itself as green.

The Green Party’s euro working group, made up of foreign policy, finance and economic specialists, first of all says that, realistically speaking, it will take 10-20 years to deal with Greece’s debt issues.

Furthermore, while many of the Greek problems are ‘home-made’, the “one-sided focus”, on the part of its creditors, on a high primary surplus has led to further economic collapse and thus growing debts. “Austerity is broken and has failed.” (‘die Kaputtsparpolitik ist gescheitert’). Moreover, today’s short-term crisis management, which merely moves from one payment to the next, needs to stop.

Future reforms should no longer target ordinary citizens, but above all the wealthy and the profiteers of ‘nepotism’. If Athens is consistent in applying these reforms, it would be rewarded with further reductions in interest rates and repayment terms.

From this vantage point, the Green Party proposes the following scenario:

• Primary surpluses achieved until 2020 should remain in the country for Athens to finance its domestic programs with, and not be used for debt servicing.

• Greek debts to the ECB and IMF should be taken over – and serviced – by the European Stability Mechanism (ESM) as part of a third loan program, in return for an ‘ambitious reform program’. This loan program would need to stay in place until the Greeks can, as a result of the reforms, service their own obligations again. The reform program should serve to achieve an effective and sustainable government reform, to stabilize the economy and to create a stable framework for investment in Greece.

• Athens wouldn’t have to start servicing its European Financial Stability Facility (EFSF) loans until 2022.

• New and additional loans could be awarded for which Greece will only have to pay interest in times of economic growth. This idea, earlier also raised by the Syriza government, is modeled on the 1953 plan according to which Germany was allowed to pay war debts only in times when it had trade surpluses.

We’ll have to wait and see how much weight the German Greens carry in Europe. They have 10% of the seats in the German parliament, and the European Green alliance has just 7% in the European parliament.

It is, however, obvious that alternative views exist to those prevalent among the troika members, whose unity also threatens to be shattered as substantial differences between EU and IMF standpoints have started floating to the surface.

However it may be, it’s not a plan that Merkel and Schäuble can just sweep under the carpet. They will have to come with a well-argumented response.

And Greece will need to be offered a way to make its next set of debt payments, starting with a big one on May 12.