investors Archives - The Automatic Earth

Catchy, but A Christmas Carol might be a better example. ‘Investors’ believe the ghosts are real, just like they believe markets are real. Read yesterday’s 2019: Zombie Markets Before The Fall to understand why that is nonsense.

• Investors Are Speechless: “It’s Like Watching Pulp Fiction” (ZH)

With market action becoming increasingly surreal and the panicked, vertigo-inducing bear market rallies (spawned by a record $64 billion pension fund reallocation into stocks in a historically illiquid market) reminiscent of the chaos observed at the depths of the financial crisis, it is only appropriate that some of the quotes Bloomberg picked for its daily wrap piece which commemorated the biggest intraday reversal since 2010, be just as surreal. “Investors are becoming desensitized,” Bryce Doty, SVP at Sit Investment Associates, told Bloomberg, then continued the verbal poetry: “It’s like watching ‘Pulp Fiction.’ Halfway through, the violence doesn’t even bother you anymore.”

He’s right, although whereas the market “violence” in past weeks was one directional, this week it has developed a twist to trap both the bulls and bears, and while the latest Dow swing (of nearly 1000 points) was only slightly bigger than the average up-and-down move last week, back then equities were merely tumbling, now it tends to drop early in the day then soar in afternoon trading. So fast forwarding to the post-Christmas chaos – which this website explicitly warned about when last Friday we said to “Brace For Seismic Volatility” – strategists are starting to ask: if days like these are now normal, is there a context in which the whole three-month rout starts to feel routine?

There are the optimists like Jim Kelleher, director of research at Argus Research, who said market turmoil that happens when the economy is holding up reminds him of past stock declines that ended gently. Unless evidence emerges of deep global growth erosion, what’s going on now “will prove to be shorter and more shallow than the declines experienced in ‘classic’ bear markets.” Others are not so sure: “Investors are wondering if this will be a crash,” said Dave Campbell, a principal at San Francisco’s BOS, who nonetheless still managed to put a favorable spin on events.

“The risks are there, but they’re always there. They’re more heightened but it’s not the most likely outcome. The economy continues to grow – maybe a little more slowly – but next year markets will have hit their lows and we’ll be on the rebound.” Then there are those who echo what we asked yesterday, namely if this is only a bear market rally, although granted a very furious one: as Bloomberg writes in its second end of day wrap, “on the surface, the rally is good news for investors searching for a bottom after a three-month sell-off sent the S&P 500 to the brink of a bear market. But days like this are rarely good omens.”

What’s happening is much more profound than bear markets.

• Investors Fear Historic Market Rebound Was Just A ‘Wicked Bear Trap’ (MW)

It’s been a rough three months, and a particularly difficult December, for stocks, however. The Nasdaq is in a bear market while the Dow and S&P 500 are solidly in correction territory and nursing hefty December losses and year-to-date declines. Some market watchers find big bounces in such an environment less than convincing. Russ Mould, investment director at AJ Bell, offered up the table below in a Thursday note. It takes a look back at the 20 biggest one-day percentage gains for the S&P 500 going back to 1970, a stretch that includes nearly 12,800 trading days.

[..] Bulls can take encouragement from the fact that three of the 17 other days that saw an advance of 5% or more came immediately in the aftermath of the October 1987 crash, “when buying did prove a good plan,” while two more came in March 2009, when the S&P 500 hit bottom and began its current bull run. But here’s the rub: Eight of those gains of 5% or more came during the 2007-09 bear market and three more occurred during the downturn of 2000-03, “to suggest there is still a risk that this year’s Boxing Day bonanza could be no more than a wicked bear trap set to lure investors into more trouble,” Mould wrote ahead of Thursday’s open, saying that traders and investors “will be looking out for a couple of further definitive signals before they decide it really is time to buy on the dips following this year’s Christmas selloff.”

Indeed, market veterans warn that massive, one-day rallies are often more characteristic of downturns, occurring as selloffs lead to significantly oversold technical conditions that leave markets ripe for short covering only to give way to renewed selling once the frenzy of forced buying is exhausted. Investors who short a stock are essentially betting that its price will fall by first borrowing the shares, but those traders can be forced to buy shares back if prices suddenly swing higher, which, in turn, can amplify price swings.

When is all this cheap money going to bail out?

• US Stocks Follow Record-Breaking Rise With Day Of Wild Swings (G.)

US stock markets seesawed again on Thursday as a record-breaking day of gains gave way to selling once again before rising again in late trading. By lunchtime all the major US markets were in the red, with the Dow Jones Industrial Average down 1.4%, the S&P 500 losing 1.5% and the Nasdaq off 1.9%. But most US markets ended the day in the black with the Dow up 1.13%, the S&P adding 0.85% and the Nasdaq 0.38%. After a series of often wild swings the US stock markets are still on course to end the year in bear market territory – triggered when markets fall 20% from their most recent high. A bear market would be the first in close to a decade.

Michael Antonelli, managing director, institutional sales trading at Robert W Baird in Milwaukee, said he expected more dramatic days aheads. “There’s only two more sessions left before the end of the year. I would expect volatility to reign. It’s dug in like a tick,” he said. Stocks had fallen for four consecutive days through Monday. Wednesday’s rally – with the Dow adding close to 5% and a record 1,080 points – could have signaled a turning point. Markets closed up in Japan and Australia but European markets sank again on Thursday, with the FTSE closing down 1.5% in London, sinking to it’s lowest level since July 2016 (a month after the Brexit vote). Germany’s DAX closed down 2.3% and France’s CAC fell 0.6%

Stock markets have become increasingly volatile in recent months and recorded both record losses and record gains this week. The Dow Jones plummeted 653 points on Monday, capping its worst week in a decade and marking its “worst day of Christmas Eve trading ever”.

The low VIX shows you how out of touch the financial world is. There can be only one reason for it: the Fed.

• VIX Is About To Do Something It Hasn’t Done Since 2011 (MW)

It shouldn’t come as a surprise to anyone paying attention that stock-market volatility is on the rise. But here’s a statistic that underlines the phenomenon. The Cboe Volatility Index, commonly known as the VIX and often, if not sometimes derisively, referred to as Wall Street’s fear gauge, was on track Thursday to close above 30 for the fourth day in a row. The index, an options-based measure of expected volatility over the coming 30-day period, traded at 32.92 in recent action, up 2.51 points. According to data compiled by Dow Jones Market Data, that would be the longest streak since a 14-day run that ended in November 2011, surpassing a three-day period seen in August 2015. The index has a long-term average near 20.

It’s certainly been a week of whipsaw trading for investors. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite all falling more than 2% in Monday’s holiday-abbreviated session to post the worst Christmas Eve performance in Wall Street history, only to roar back on Wednesday to more than reverse those declines as the S&P and Dow jumped 5% each and the Nasdaq gained 5.8%. On Thursday, stocks were back under pressure, with the Dow giving up more than half of the previous day’s 1,086-point gain.

Robert Fisk is done. Comparing Putin to Hitler on the brink of 2019 is all we need to know. BTW, Mattis DID consider running.

• Watch Out When Men Of War Come To The Rescue (Fisk)

When a general popularly known as James “Mad Dog” Mattis abandons a really mad American president, you know something has fallen off the edge in Washington. Since the Roman empire, formerly loyal military chiefs have fled crackpot leaders, and Mattis’s retreat from the White House might have the smell of de Gaulle and Petain about it. De Gaulle was confronted by an immensely powerful hero of the people – the Lion of Verdun – who was, in his dotage, about to shrug off the sacred alliance with Britain for Nazi collaboration (for which, I suppose, read Putin’s Russia). The decision was made to have nothing to do with Petain, or what Mattis now refers to as “malign actors”. De Gaulle would lead Free France instead.

Mattis has no such ambitions – not yet, at any rate – although there are plenty of Lavals and Weygands waiting to see if Trump chooses one of them for his next secretary of defence. Besides, history should not grant Trump and Mattis such an epic panorama. After all, no Trump tweet could compare with Petain’s 1916 “We’ll get them!” (“on les aura”) slogan, and the dignified, cold and fastidious de Gaulle would never have lent himself to the rant Mattis embarked upon in San Diego in 2005: “You go into Afghanistan, you got guys who slap women around for five years because they didn’t wear a veil. You know, guys like that ain’t got no manhood left anyway. So it’s a hell of a lot of fun to shoot them. Actually, it’s a lot of fun to fight. You know, it’s a hell of a hoot. It’s fun to shoot some people. I’ll be right upfront with you, I like brawling.”

If investigations like this are not held, the US risks becoming a very volatile place.

• Giuliani: Mueller Must Be Investigated For Destruction Of FBI Evidence (Hill)

Rudy Giuliani has an unmistakable New Year’s message for special counsel Robert Mueller: It is time for the chief investigator in the Russia case to be investigated in 2019. In wide-ranging interviews with Hill.TV’s Buck Sexton and me on Wednesday and Thursday, President Trump’s defense lawyer pointedly accused Mueller’s office of destroying evidence by allowing text messages from now-fired FBI official Peter Strzok and his FBI lover, Lisa Page, to be erased in the Russia probe. “Mueller should be investigated for destruction of evidence for allowing those text messages from Strzok to be erased, messages that would show the state of mind and tactics of his lead anti-Trump FBI agent at the start of his probe,” Giuliani said.

The Justice Department inspector general (IG) reported this month that it found large gaps in the preservation of official government text messages between Strzok and Page, the two top FBI agents who helped to start the Russia probe in 2016, who were having an affair at the time, and who expressed disdain for Trump. The report said a technical glitch was to blame for the FBI’s failure to save those text messages, but the IG was able to recover more than 19,000 from the early part of the Russia probe before Mueller was named special prosecutor. However, the IG said it was unable to recover messages from the time Strzok and Page worked for Mueller’s office in spring and summer 2017 because the memories of both FBI officials’ government phones were wiped clean by technicians.

That erasure occurred after Strzok and Page left Mueller’s team over revelations they exchanged anti-Trump text messages, including one string in which they talked about stopping Trump from becoming president. “That should be investigated, damn it, that should be investigated fully. You want a special counsel, get one for that,” Giuliani said.

Really? The UN is going to pick sides? Against Trump and pro Big Tech?

• Donald Trump ‘Worst Perpetrator’ Of Fake News: UN Special Rapporteur (Pol.eu)

The President of the United States is the “worst” perpetrator of misinformation on the internet, the U.N. Special Rapporteur on Freedom of Expression and Opinion David Kaye said in an interview published today. “Governments are real offenders when it comes to disinformation,” said Kaye. “In my own country, the United States, the worst perpetrator of false information is the President of the United States.” The problem of fake news emanating from governments should be covered by journalists, the rapporteur said. Platforms such as Google, Facebook or Twitter can help the broader fight against disinformation — bots, foreign interference… — but should not remove content, Kaye said.

“The platforms, I think, can do things that are more technical as long as they are not evaluating content. There are things they can do. They can’t just zap it and say, “This is fake news, it’s off the platform.” According to Kaye, platforms should focus on reducing spam and bot accounts rather than on policing content. And even bots are “tricky, because there are good bots and bad bots.” Google, Facebook and Twitter are under intense pressure from the European Commission to tackle fake news ahead of the European election in May 2019.

When did the Yellow Vests become an insect species?

• Macron Lost Authority After Caving To Yellow Jackets – EU’s Oettinger (Pol.eu)

The EU will accept a French budget deficit above the EU’s 3 percent ceiling in 2018 “as a one-time exception,” Budget Commissioner Günther Oettinger said in an interview published Thursday. Oettinger told the Funke media group of German newspapers that French President Emmanuel Macron had “lost authority with his budget for 2019” by upping his spending in response to the Yellow Jackets protests, “but he remains a strong supporter of the European Union.” Brussels reviewed the French budget several weeks ago and won’t be revisiting it, Oettinger added. “It crucial now that Macron continues his reform agenda, especially in the labor market, and that France remains on its growth track.”

“Under this condition, we will tolerate a national debt higher than 3 percent as a one-time exception. However, it must not continue beyond 2019.” Oettinger also told the Funke media group that there’s still a chance Britain’s parliament will vote in favor of Prime Minister Theresa May’s Brexit deal in January and that “there is certainly no majority for a disorderly Brexit or for a new referendum.” If the U.K. leaves the bloc without a Brexit deal, it will become “a third country like Morocco or Azerbaijan,” Oettinger said. He added that if Britain withholds its divorce payment in 2019, Germany would be left footing the bill “in the mid-three-digit range” of hundreds of millions of euros.

The sudden urgency is too late.

• Corbyn Wants May To Recall MPs Early Over Critical Brexit Vote (Ind.)

Jeremy Corbyn has challenged Theresa May to cut short the Christmas recess and recall parliament early in the new year in order to bring forward a critical vote on the Brexit deal. In an interview with The Independent, the Labour leader said he believed the prime minister and her allies were engaged in a “cynical manoeuvre” to run down the clock and offer MPs the “choice of the devil or the deep blue sea”. His remarks come as the Commons prepares to vote on the UK-EU deal in the week beginning 14 January – in what is being billed as the most significant moment in parliament for a generation.

With just 91 days remaining until Britain formally leaves the European Union, Mr Corbyn also reiterated it is a matter of “when, not if” Labour attempts to force a general election by tabling a motion of no confidence in the government, which he signalled will come in the aftermath of Ms May’s deal failing to receive MPs’ backing. But he refused to be drawn on whether a Labour government would seek to extend Article 50, given that just weeks would remain for any renegotiation of Britain’s exit from the bloc, and claimed: “Lots of things are possible, the EU has longform on reopening and extending negotiations, but let’s not jump too many hoops when we haven’t arrived at them.”

Speaking in his constituency office in Islington, north London, ahead of Christmas Day, he poured scorn on the prime minister’s decision earlier this month to pull a vote on the deal in the face of near-certain defeat and instead begin a last-ditch attempt to seek assurances from the EU to assuage Brexiteers’ concerns over the contentious issue of the Irish backstop. Pressed on whether he believed Ms May should now recall parliament a week early, on 2 January, the Labour leader replied: “Well it is in her hands to recall parliament. I want us to have a vote as soon as possible, that’s what I’ve been saying for the past two weeks, and if that means recalling parliament to have the vote let’s have it.

“But it looks to me the government has once again reneged on that and tried to put it back another week. We need to have that vote so a decision of parliament can be made. What I suspect is that it’s a completely cynical manoeuvre to run down the clock and offer MPs the choice of the devil or the deep blue sea.”

For some, perhaps.

• Brexit’s Aura Of Inevitability Is Vanishing (Kaletsky)

In times of political turmoil, events can move from impossible to inevitable without even passing through improbable. In early 2016, the idea of Britain leaving the European Union seemed almost as absurd as the next American president being the six-time bankrupt and serial sex pest Donald Trump. A few months later, Brexit and the Trump presidency were universally acknowledged as the inevitable consequence of an anti-elitist, anti-globalization backlash that was predictable decades ago. This sense of inevitability, far more than genuine anti-European conviction, is what has discouraged Britain from changing its mind about a pointless and self-destructive policy that few voters cared about until 2016.

The message from post-Brexit polling and focus groups has been: “We all know that Brexit has to happen, so why don’t the politicians just get on with it?” But with the Brexit process now moving toward its climax, another outcome is moving from impossible to inevitable: Britain could soon change its mind and decide to stay in the EU. This reversal of fortune could begin next month, when Prime Minister Theresa May is expected to lose the decisive parliamentary vote on her Brexit deal. If and when this defeat happens, May will face two unpalatable options. She could preside over a “No Deal” rupture with Europe — tantamount to a declaration of economic war against the EU — and risk a 2008-level economic crisis accompanied by a border upheaval in Ireland that could reignite the “Troubles.”

Or she could break her extravagant promises to honor the “people’s instruction” from the 2016 referendum and allow a new popular vote that might cancel Brexit. To avoid this invidious choice, May could try one last time to push her proposals through Parliament after losing the vote scheduled for the week of January 14. But if this last-ditch effort fails, her choices will be reduced to a No Deal rupture with Europe and a new referendum.

Varoufakis is basically right, but I can’t see a three-year People’s Debate tackling 6 issues. Brits will think: we can’t even deal with one issue. And an extension of a transition period until 2022 is hard to see, too.

• Turning Brexit Into a Celebration of Democracy (Varoufakis)

With weeks left before the UK leaves the EU by default, none of the three main options on offer – a no-deal Brexit, Prime Minister Theresa May’s withdrawal agreement with the EU, and rescinding Article 50 in order to remain in the EU – commands a majority in Parliament or among the population. Each generates maximum discontent: The no-deal scenario strikes most as a dangerous plunge into the unknown. May’s deal appalls Remainers and is seen by most Leavers as the kind of document only a country defeated at war would sign. Lastly, a Brexit reversal would confirm Leavers’ belief that democracy is allowed only when it yields results favored by the London establishment.

The conventional wisdom in Britain is that this impasse is lamentable, and that it proves the failure of British democracy. I disagree on both counts. If any of the three immediately available options were endorsed, say, in a second referendum, discontent would increase and the larger questions plaguing the UK would remain unanswered. Britons’ reluctance to endorse any Brexit option at present is, from this perspective, a sign of collective wisdom and a rare opportunity to come to terms with the country’s great challenges while re-thinking the UK’s relationship with the EU. But to seize it, the UK must invest in a “People’s Debate,” leading, in time, to a “People’s Decision.”

The People’s Debate must address six issues: the British constitution, including the creation of an English parliament or multiple regional English assemblies; the electoral system and the role of referenda; the Irish question, including the possibility of joint UK-Irish sovereignty over Northern Ireland; migration and freedom of movement; Britain’s economic model, particularly the outsize role of finance and the need to boost green investment across the country; and of course the UK-EU relationship.

Proudly poisoning your food for 100 years.

• Crime and Punishment in an Age of the Jungle (Vallianatos)

[..] studies funded by EPA and others have been connecting farmers’ sprays to ecocide, disease and death. I traced the catastrophic decline of honeybees to the neurotoxic pesticides of the farmers. This brought me in touch with a caring beekeeper from Colorado named Tom Theobald. He was telling me his days as a beekeeper were coming to an end. In December 2018, he summarized 44 years of living with honeybees and the poisoners of honeybees. “Almost every problem we face,” he said, “can be traced to a Criminal Corporatism and an out of control Capitalism. If there is a profit to be made, there is little regard paid to the consequences. If challenged, we get denial, diversion, excuses and junk science. It simply doesn’t matter how many people are sickened or die, how many species are pushed to extinction or how seriously the planet is compromised.”

[..] We are fortunate we have a reliable history of that irresponsible age by Deborah Blum, director of the Knight Science Journalism Program at MIT. A prolific and outstanding writer, Blum is telling a story that illuminates both early twentieth century, but, perversely, our own times. Her timely book, The Poison Squad: One Chemist’s Single-Minded Crusade for Food Safety at the Turn of the Twentieth Century (Penguin Press, 2018) paints an unforgettable picture of an American table full of “adulterated” food. Milk and meat were routinely treated with formaldehyde, a carcinogen used for embalming of corpses. Wine drinkers drank a liquid that had nothing to do with grapes. Wine was made from “tannin and coal tar.”

The poisonous copper sulphate dressed canned vegetables. The cleaning chemical borax coated butter. Honey had nothing to do with real honey. It was rather a version of “thickened, colored corn syrup.” Coffee was usually “sawdust, or wheat, beans, peas and dandelion seeds, scorched black and ground to resemble the genuine article.” Bread was baked with alum or chalk, or “sawdust chopped up very fine or gypsum in powder… Terra alba just out of the mine.” There was no law against the poisonous adulteration of food and drink. However, the adulteration of food, Blum says, gave sickness and death, potentially to huge number of Americans. Tainted milk alone killed thousands of children in New York City every year.

The Only Real Europe is Greece

Sep 132017

September 13, 2017 Posted by Raúl Ilargi Meijer at 7:09 pm Finance Tagged with: austerity, EU, fire sale, Greece, investors, Juncker, Merkel, mob, property, sock puppet, sovereignty 2 Responses »

Eugene Delacroix Greece expiring on the Ruins of Missolonghi 1826

European Commission president Jean-Claude Juncker, famous for his imbibition capacity and uttering -not necessarily in that order- the legendary words “when it becomes serious, you have to lie”, presented his State of the Union today. Which is of pretty much limited interest because, as Yanis Varoufakis’ book ‘Adults in the Room’ once again confirmed, Juncker is nothing but ventriloquist Angela Merkel’s sock puppet.

But of course he had lofty words galore, about how great Europe is doing, and how that provides a window for more Europe, in multiple dimensions. Juncker envisions a European Minister of Finance (Dutch PM Rutte immediately scorned the idea), and he wants to enlarge the EU by inviting more countries in, like Albania, Montenegro and Serbia (but not Turkey!).

Juncker had negative things to say about Britain and Brexit, about Poland, Prague and Hungary who don’t want to obey the decree about letting in migrants and refugees, and obviously about Donald Trump: Brussels apparently wants ‘to make our planet great again’.

What the likes of Jean-Claude don’t seem to be willing to contemplate, let alone understand or acknowledge, is that the EU is a union of sovereign countries. The meaning of ‘sovereignty’ fully escapes much of the pro-EU crowd. And if they keep that up, it will break the union into pieces.

The European Court of Justice has ruled that Poland, the Czech Republic and Hungary must accept their migrant ‘quota’, as decided in Brussels, and that, too, constitutes an infringement on these countries’ sovereignty. And don’t forget, sovereignty is not something that can be divided into separate parts, some of which can be upheld while others are discarded. A country is either sovereign or it is not.

The single euro currency is already shirking awfully close to violating sovereignty, if not passing over an invisible line, and a European Finance Minister would certainly constitute such a violation. At some point, the politicians in all these countries will have to tell their voters that they’re about to surrender -more of- their sovereignty and become citizens of Merkel Land. But they don’t want to do that, because as soon as people would realize this, the pitchforks would come out and the union would be history.

The EU will be able to muddle on for a while longer, but Europe is not at all doing great economically (however, to maintain the illusion ECB head Draghi buys €60 billion a month in ‘assets’), and when the next crisis comes people will demand their sovereignty back. It really is that simple. And what will the negotiations look like to make that happen? 27 times Brexit?

The real Europe is not the one Juncker paints a portrait of. The real Europe is Greece. That’s where you can see the economic reality as well as the political one. Greece has no sovereignty left to speak of, despite the fact that it is guaranteed it in EU law. Europe’s political reality is about raw power. About the rich waterboarding the poor, to the point that they are turned from sovereign citizens of their countries into lost souls in debt prisons.

This week, another chapter has been added to the dismal annals of the Greek adventures in the European Union. It’s like the Odyssee, I kid you not. Like the previous chapters, this one will not solve the Greek crisis, or even alleviate it, but instead it will deepen it further, and not a little bit. This chapter concerns the forced auctioning of -real estate- properties.

Not to Greeks, 90% of whom can’t afford to buy anything at all, let alone property, but to foreigners, often institutional investors. At the same time, bad loans, including mortgage loans, will be offloaded for pennies on the dollar to that same class of ‘investors’. Once the Troika is done with this chapter, Greece will have seen capital destruction the likes of which the world has seldom if ever witnessed.

People in the country have a hard time understanding the impact:

Greece Property Auctions Certain To Drive Market Prices Even Lower

Ilias Ziogas, head of property consultancy company NAI Hellas and one of the founding members of the Chartered Surveyors Association, said that the property market is certain to suffer further as a result of the auctions: “The impact on prices will be clearly negative, not because the price of a property will be far lower at the auction than a nearby property, but because it will diminish demand for the neighboring property.”

[..]Giorgos Litsas, head of the GLP Values chartered surveyor company, which cooperates with PQH [..] told Kathimerini that the only way is down for market rates. “I believe that unless there is an unlikely coordination among the parties involved – i.e. the state (tax authorities, social security funds etc.), the banks and the clearing firms – in order to prevent too many properties coming onto the market at the same time, rates will go down by at least 10%.”

He noted that “we estimate the stock of unsold properties of all types comes to 270,000-280,000, in a market with no more than 15,000 transactions per year. Therefore the rise in supply will send prices tumbling.” Yiannis Xylas, founder of Geoaxis surveyors, added, “I fear the auctions will create an oversupply of properties without the corresponding demand, which translates into an immediate drop in rates that may be rapid if one adds the portfolios of bad loans secured on properties that will be sold to foreign funds at a fraction of their price.”

A 10% drop? Excuse me? Even in the center of Athens, rental prices for apartments that are not yet absorbed by Airbnb have plummeted. With so many people making just a few hundred euro a month that is inevitable. You can rent a decent place for €200 a month, and if you keep looking I’m sure you can find one for €100. An 80% drop?! But property prices would only go down by 10% in a market that has 20 times more unsold properties than it sells in a year?

The Troika creditors found they had to deal with attempts to prevent the wholesale fire sale of Greek properties. They now think they’ve found the solution. First, they will force the government to lower official valuations concerning the so-called “primary residence protection”, which protected homes valued at below €300,000 from foreclosure. Second, they will bypass the associations of notaries who refused to cooperate in ‘physical’ auctions, as well as protesters, by doing the fire sale electronically:

E-Auctions Of Foreclosed Property For First Time This Month In Greece

Environment and Energy Minister Giorgos Stathakis confirmed the development in statements to a local television station, announcing the relevant justice ministry is ready to begin electronic auctions in the middle of next week.At the same time, Stathakis noted that a law protecting a debtor’s primary residence from creditors will be expanded until the end of 2018. According to reports, the e-auctions will take place every Wednesday, Thursday and Friday over a four-hour period, i.e. from 10 a.m. to 2 p.m. or 2 p.m. to 6 p.m. Some 5,000 foreclosed commercial properties will be up for sale by the end of the year, which translates into 1,250 properties per month, on average.

Currently, the primary residence protection against foreclosure extends to properties valued (by the State tax bureau) at under €300,000, a very high threshold that shields the “lion’s share” of mortgaged residential real estate in the country, if judged by current commercial property values in Greece. Creditors and local lenders have called for a decrease in the protection threshold, a prospect that is very likely.

The development is also expected to generate another round of acrimonious political skirmishing, given that both leftist SYRIZA, and its junior coalition partner, the rightist-populist Independent Greeks party, rode to power in January 2015 on a election campaign platform that included an almost universal protection of residential property from bank foreclosures and auctions.

Associations representing notaries – professionals who in Greece are law school graduates specializing in drawing up contracts and maintaining registries of deeds, property transactions, wills etc. – had also blocked old-style auctions from taking place in district courts by ordering their members not to take part. The e-auction process aims to bypass this opposition, as well as disruptions and occupations of courtrooms by anti-austerity protesters.

The claim is that Greek banks must be made healthy again by removing bad loans from their books. The question is if selling both properties and bad loans to foreign institutional investors for pennies on the buck is a healthy way to achieve that. But yeah, if 50% of your outstanding loans are bad, you have a problem. Still, at the same time, the problem with that is that many if not most of those loans have turned sour because of the neverending carrousel of austerity measures unleashed upon the country. It’s a proverbial chicken and egg issue.

If Brussels were serious about Greek sovereignty, it would make sure that Greek homes were to remain in Greek hands. You can’t be sovereign if foreigners own most of your real estate. By bleeding the country dry, and forcing the sale of Greek property to Germans, Americans, Russians and Arabs, the Troika infringes upon Greek sovereignty in ways that will scare the heebees out of other EU nations.

It’s not for nothing that the entire Italian opposition is talking about a parallel currency next to the euro. That is about sovereignty.

5,000 Greek Properties Under the Electronic Auction System by End of 2017

Auctions of foreclosed properties to settle bad debts are seen as key to returning Greek banks to health by helping reduce the burden of non-performing loans. These currently stand at roughly €110 billion, or 50% of the banks’ total loans. Under pressure from its lenders, in the summer of 2016 the Greek government passed measures allowing the sale of delinquent mortgages and small business loans to international funds, a move seen by many as yet another betrayal by the SYRIZA-led government.

Greek banks won’t return to health, they’ll simply shrink the same way the people do who can’t afford to rent a home or eat decent food. Austerity kills entire societies, including banks. If Mario Draghi would decide tomorrow morning to include Greece in his €60 billion a month QE bond-buying program, and Greece could use that money to stop squeezing pensions and wages, and no longer raise taxes and unemployment, both the people AND the banks could return to health. It would take a number of years, but still.

Attica! Attica!

Whatever you call what happens to Greece, and what’s been happening for nearly 10 years now, whether you call it fiscal waterboarding or Shock Doctrine, it is definitely not something that has a place in a union of sovereign nations bound together in mutual respect and dignity. And that will ensure the demise of that union.

Another aspect of the fire sale is the valuation of the properties austerity has caused to crumble (so many buildings in Athens are empty and falling apart, it’s deeply tragic, at times it feels like the entire city is dying). The press calls it a hard task, but that doesn’t quite cover it.

It’s not just about mortgages, many Greeks simply give up their properties because they can’t afford the taxes on them. People that inherit property refuse to accept their inheritance, even if it’s been in their families for generations, and it’s where they grew up. In that sense, it may be good to lower valuations to more realistic levels. But tax revenues will plunge along with the valuations, and the government is already stretched silly. Add a new tax, then?

Greece Property Value Review A Hard Task

The government is facing a daunting task in adjusting the so-called objective values (the property rates used for tax purposes) to market levels by the end of the year, as its bailout agreement dictates. The huge slump in transactions and the forced sales of properties due to their owners’ debts do not lead to any safe conclusions for the values per area. One in four sales are conducted with prices that lag the objective value by 60-70%, and the prices of 2008 by 70-80%. The Finance Ministry must overcome all the obstacles to bring to Parliament all the necessary adjustments and regulations.

Moreover, once the objective values are brought in line with market rates, the government will have to maintain the same amount of revenues from the Single Property Tax (ENFIA) either by raising the tax’s rates or by introducing a new tax in the form of the old Large Property Tax.

Furthermore, once the objective values are reduced by 40-50% to match the going prices, banks may see problems with their capital adequacy, as lenders will incur losses by having to revise the collateral they get. Mortgage loans in Greece amount to €59.44 billion, of which 42%, or €25.4 billion are nonperforming.

Yeah, there’s the health of the banks again. And the government. And the people. A wholesale fire sale is the worst possible thing that could happen at this point in time. Greece needs help, stimulus, hope, not more austerity and fire sales. Juncker and his Berlin ventriloquist have this all upside down and backwards, squared. The one thing the EU cannot afford itself to do, is the one thing it engages in.

They may as well pack in the whole thing today, and go home. Actually, that would be by far the best option, because more of this will inevitably lead to the very thing Europe prides itself in preventing for the past 70 years: battle, struggle, war, fighting in the streets, and worse. If the EU cannot show it exists for the good and benefit of its people, it no longer has a reason to exist.

Saving the banks in the richer countries by waterboarding an entire other country is not just the worst thing they could have thought of, it’s entirely unnecessary too. The EU and ECB could easily have saved Greece from 90% of what it has gone through, and will go through going forward, at virtually no cost at all. But yes, German, French, Dutch banks would likely have had to cut the bonuses of their bankers, and their vulture funds couldn’t have snapped up the real estate quite that cheaply.

Summarized: the EU is a disgrace, morally, politically, economically. I know that French President Macron on the one side, and Yanis Varoufakis’ DiEM25 movement on the other, talk about reforming the EU. But the EU is the mob, and you don’t reform the mob. You dismantle their organization and then you lock them up.

Debt Rattle October 3 2015

Oct 032015

October 3, 2015 Posted by Raúl Ilargi Meijer at 9:09 am Finance Tagged with: buybacks, China, credit, debt, emissions, investors, jobs, migrants, refugees, VW Comments Off

DPC Looking south on Fifth Avenue at East 56th Street, NYC 1905

• US Job Growth Disappoints Even More than Usual (NY Times)

• US Payrolls Disaster: Only 142K Jobs Added In September With Zero Wage Growth (ZH)

• Fed: The 94.6 Million Americans Out Of The Labor Force ‘Don’t Want A Job’ (ZH)

• Companies Are Cutting Jobs And Buying Back Stock At The Same Time (MarketWatch)

• Credit Investors Bolt Party as Economy Fears Trump Low Rates (Bloomberg)

• Market Signals Mean Investors Must Start To Question Assumptions (John Authers)

• Jeff Gundlach: Expect ‘Another Wave Down’ In Markets (Reuters)

• The Reality Behind The Numbers In China’s Boom-Bust Economy (Mises Inst.)

• China Imposes New Capital Controls (Chang)

• VW Scandal Deepens As France And Italy Launch Deception Inquiries (Guardian)

• Volkswagen: Full Chronology of The Scene of the Crime (Handelsblatt)

• VW Tsunami: Falsified Emissions Push Company to Limits (Spiegel)

• VW Emissions Cheating Scandal Heading To US Congress (CNBC)

• VW Financial Services Arm A Risk Investors May Be Overlooking (CNBC)

• Canada Opposition Warns TPP Deal Not Binding Ahead Of Imminent Election (G&M)

• Australia Is “Going Down Under”: “The Bubble Is About To Burst”, RBS Warns (ZH)

• Half of World’s Coal Output Is Unprofitable (Bloomberg)

• From Here On Out, This Is Not A Video Game – This Is Real (Martin Armstrong)

• Channel Tunnel Closed As Migrants Occupy Complex (AFP)

• UN Refugee Agency: Over 1.4 Million To Cross Mediterranean To Europe (Reuters)

Go figure: 94.6 million ‘out of the labor force’, but NY Times states: “..weak demand for labor accounts for an estimated 2 million working-age men and women who currently do not have jobs or are not looking for jobs.”

• US Job Growth Disappoints Even More than Usual (NY Times)

The jobs report for September was a real letdown, and that is saying a lot, because what has passed for strong growth in the past year – 243,000 jobs a month on average before the latest data pulled the average down – has always been disappointing. It was a big improvement from job growth earlier in the recovery, but it was still too slow and too uneven to restore full employment and pull up wages. Then, last month, the economy added a scant 142,000 jobs and monthly tallies for July and August were revised down by 59,000 jobs. The labor force shrank – and not only because of retirements. Rather, weak demand for labor accounts for an estimated 2 million working-age men and women who currently do not have jobs or are not looking for jobs.

In addition, the share of 25 to 34-year-olds with jobs, a crucial demographic for home buying, has flattened recently, having never recovered its pre-recession level. There was, yet again, no meaningful wage growth in September. A slower pace of overall job growth plus flat wages is an especially bad sign for consumer spending. A cloudy outlook for spending implies a cloudy outlook for the economy. The best response to a report like September’s is to withhold judgment until more data comes in. It is hard, however, to be optimistic. In September, roughly as many industries gained employment as lost employment. In a healthy economy, employment gains outweigh employment losses across industries.

In the manufacturing sector, employment declines have been greater than employment gains for the past two months. The fear is of a continued slide. The Federal Reserve has rightly held off on interest rate increases in order to give the job market more time to recover. But robust recovery has been hindered, in large part, by the failure of Congress to use fiscal support to amplify the Fed’s efforts. If economic growth were to slow in what is still a near-zero interest rate environment, the Fed would not be able to jolt the economy with interest rate cuts. Janet Yellen, the Fed’s chairwoman, alluded to that possibility in a speech earlier this year. If it came to pass, Congress would be the economy’s best hope for stimulus policy. Would lawmakers step up? Like I said, it’s hard to be optimistic.

“..the household survey was an unmitigated disaster, with 236,000 jobs lost in September..”

• US Payroll Disaster: Only 142K Jobs Added In September With Zero Wage Growth (ZH)

And so the “most important payrolls number” at least until the October FOMC meeting when the Fed will once again do nothing because suddenly the US is staring recession in the face, is in the history books, and as previewed earlier today, at 142K it was a total disaster, 60K below the consensus and below the lowest estimate. Just as bad, the August print was also revised far lower from 173K to 136K. And while it is less followed, the household survey was an unmitigated disaster, with 236,000 jobs lost in September. Putting it into perspective, in 2015 job growth has averaged 198,000 per month, compared with an average monthly gain of 260,000 in 2014. The recession is almost here.

As noted above, the headline jobs print was below the lowest Wall Street estimate. In other words 96 out of 96 economisseds did what they do best. The unemployment rate came in at 5.1% as expected but everyone will be focusing on the disaster headline print. And worst of all, average hourly wages stayed flat at 0.0%, also below the expected 0.2%. Actually, if one zooms in, the change was not 0.0%, it was negative, while weekly earnings actually declined from $868.46 to $865.61. Finally, not only were workers paid less, they worked less, as the average hourly weekweek declined from 34.6 hours to 34.5, suggesting an imminent collapse in economic output.

“..there are nearly 100 million working-age Americans who could be in the labor force, but are not, “mostly” because they don’t want a job.”

• Fed: The 94.6 Million Americans Out Of The Labor Force ‘Don’t Want A Job’ (ZH)

In a note seeking to “explain” why the US labor participation rate just crashed to a nearly 40 year low earlier today as another half a million Americans decided to exit the labor force bringing the total to 94.6 million people… this is what the Atlanta Fed has to say about the most dramatic aberration to the US labor force in history: “Generally speaking, people in the 25–54 age group are the most likely to participate in the labor market. These so-called prime-age individuals are less likely to be making retirement decisions than older individuals and less likely to be enrolled in schooling or training than younger individuals.”

This is actually spot on; it is also the only thing the Atlanta Fed does get right in its entire taxpayer-funded “analysis.” However, as the chart below shows, when it comes to participation rates within the age cohort, while the 25-54 group should be stable and/or rising to indicate economic strength while the 55-69 participation rate dropping due to so-called accelerated retirement of baby booners, we see precisely the opposite. The Fed, to its credit, admits this: “participation among the prime-age group declined considerably between 2008 and 2013.” And this is where the wheels fall off the Atlanta Fed narrative. Because the regional Fed’s very next sentence shows why the world is doomed when you task economists to centrally-plan it:

The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don’t want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don’t want a job.

And there you have it: there are nearly 100 million working-age Americans who could be in the labor force, but are not “mostly” because they don’t want a job.

How to destroy your economy in 2 easy steps.

• Companies Are Cutting Jobs And Buying Back Stock At The Same Time (MarketWatch)

How would you feel if the company that just laid you off said it was spending millions of dollars, or even billions, to buy back its stock? At least you wouldn’t feel lonely. U.S. companies announced 205,759 job cuts during the third quarter, the most since the third quarter of 2009, just after the Great Recession, according to data provided by outplacement company Challenger, Gray & Christmas In September, the number of announced job cuts was nearly double what it was at the same time last year. On Friday, the Labor Department released a stinker of a September jobs report. At the same time, share repurchases announced by U.S. companies during the third quarter remains around the highest levels in at least the last decade, according to data provider Dealogic.

In September, companies authorized buybacks totaling $243.4 billion, more than seven times the amount announced in the same month a year ago, Dealogic said. One might think these corporate actions are mutually exclusive, but as the chart above shows, many companies are doing both. In fact, some companies have even announced job cuts and share buybacks in the same news release. Hewlett-Packard made the biggest job-cut announcement this year, according to Challenger, on Sept. 15, when it said it was laying off up to 30,000 people. In the same statement, it indicated it could spend $700 million on share repurchases in fiscal 2016. Late Thursday, Bebe Stores said in a statement that it will lay off over 50 employees, or nearly 2% of its workforce, to save about $4.8 million a year. In the next paragraph, Bebe said it authorized a $5 million share repurchase program, which at current prices represents nearly 6% of the shares outstanding.

The US is drowning in debt. Anything else is just fluff.

• Credit Investors Bolt Party as Economy Fears Trump Low Rates (Bloomberg)

Debt investors are a nervous lot these days, and new signs that global turmoil is weighing on the U.S. economic outlook are only adding to their angst. Measures of corporate credit risk spiked immediately after a Labor Department report showed that payrolls rose less than projected last month, wages stagnated and the jobless rate was unchanged. Investors are now demanding more than they have in three years to own junk bonds, which are on track to cap off their worst week this year. Frustration is growing that even after seven years of easy-money policies, economic growth remains sluggish. While the Federal Reserve is signaling that it’s in no hurry to normalize interest rates, investors are increasingly worried about what the data will mean for earnings at companies that have sold $9.3 trillion of corporate bonds since the start of 2009.

“At some point the financial markets say, ‘Enough about monetary stimulus, we need real growth,’” said Jack McIntyre at Brandywine Global Investment. “Bad things happen in a low-growth environment. There’s more risk, more potholes.” This was a tough week for the bond market. Glencore kicked things off with investor concerns that the mining and commodities trading company would have trouble harnessing its $30 billion in debt, which sent junk-bond yields skyrocketing. Weakness also spread to investment-grade credit as Hewlett-Packard had to increase the amount it was willing to pay investors to buy $14.6 billion of notes that will fund its split into two companies.

On Friday, the credit-default swaps benchmark tied to the debt of 125 investment-grade companies jumped 3.6 basis points to 98 basis points, the highest level since June 2013. The index pared the jump later in the day. Investors’ diminishing appetite for plowing money into corporate bonds has put the $6.5 trillion market for U.S. company borrowings on track to post losses this year for the first time since the 2008 financial crisis ravaged markets. “The risk environment for credit appears to have deteriorated substantially in the past few weeks,” Barclays strategists led by Jeffrey Meli and Brad Rogoff wrote in a report Friday. “There have been several examples of any negative news leading to an outsized repricing lower, particularly in high yield.”

Authers has been consistently looking at things from the wrong side. And even as he’s slowly waking up, he still does.

• Market Signals Mean Investors Must Start To Question Assumptions (John Authers)

Markets trade on a number of unspoken assumptions. For those who want to understand why markets are now signalling concern, let me list the assumptions that have recently been called into question. First, and most important, was the belief that low interest rates had driven stock markets up (particularly in the US where the central bank had been most aggressive in pumping out cheap money), and that cheap rates would keep share prices up. Last month, after much debate, the Federal Reserve made the marginal decision not to raise rates — and it triggered a sharp sell-off in world stock markets. The “good news” of cheap money was swamped by the “bad news” of the reasons for that decision. Friday’s publication of September’s employment data for the US confirms the wisdom of the Fed’s decision, and also the market’s response.

Payrolls grew by less than 150,000 for two consecutive months — the first time this has happened since 2012. Employment is still growing, and employment data are notoriously noisy. But that rate of growth is now unambiguously slowing, while long-term unemployment remains damagingly high. The instant response, judging by the Fed Funds futures market, was to put the market’s estimate of when the Fed will indeed start raising rates all the way back to March of next year. And the instant response of the stock market to the good news that money would stay cheaper for longer was to sell off, while investors piled into bonds, taking the yield on 10-year Treasury bonds below 2%.

We are now at a point where bad news on growth simply reveals that monetary policy has become impotent in the minds of investors. Economic growth is a concern, and enough of a concern to swamp any relief at countermanding easy monetary policy. Why? Because of the overturning of a second assumption — that China’s remarkable economic growth story can continue uninterrupted, under capable guidance from its political leaders. China continues to grow, but the sharp slowing of its pace, and the perceived miscues of its leaders over the summer, while handling its stock market and a slight devaluation in its currency, have shaken confidence.

There are good reasons for concern over China’s economy, and the Asian economies that surround it. As the latest supply manager surveys demonstrate, export orders are growing at their slowest since the 2009 recession, while inventories are high. The fear is that a slowing Asia will export deflation to the west — a problem that manifests itself most directly in falling prices for metals, of which China is the world’s biggest consumer. That leads to a third assumption: corporate America can be the “little engine that can”, and keep churning out rising profits. The consistent recovery of US companies’ profits since their sudden collapse during the credit crisis of 2008 and 2009 has been a wonder of the age. Cheap money, enabling buybacks of stock, helped. But that growth has also now come to a halt.

“..Markets need buying to go up and they need volume to go up.They can fall just on gravity.”

• Jeff Gundlach: Expect ‘Another Wave Down’ In Markets (Reuters)

DoubleLine Capital co-founder Jeffrey Gundlach, widely followed for his investment calls, warned after the weak jobs number on Friday that the U.S. equity market as well as other risk markets including high-yield “junk” bonds face another round of selling pressure. “The reason the markets aren’t going lower is people are holding and hoping,” Gundlach said in a telephone interview with Reuters. “The market bottoms out when people are selling and sold out — not when they are holding and hoping. I don’t think you’ve seen real selling in risk assets broadly. Markets need buying to go up and they need volume to go up.They can fall just on gravity.”

Investors piled into government bonds on Friday, sending the 10-year Treasury yield below 2%, after the Labor Department said employers hired 142,000 workers last month, far below the 203,000 forecasters had expected, and August figures were revised sharply lower to show only 136,000 jobs added. Gundlach said junk bonds are vulnerable: “I’ll think about buying when it stops going down every single day.” “People are acting like everything is great. Junk bonds are at a four-year low. Emerging markets are at a six-year low and commodities are at a multi-year low – same level as in 1995… GDP is not growing at a nominal basis.” Gundlach, whose Los Angeles-based DoubleLine was overseeing $81 billion in assets under management as of the end of the third quarter, said: “Clearly what’s happening is people are waking up to the idea that global growth is not what they thought it was.”

“What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.”

• The Reality Behind The Numbers In China’s Boom-Bust Economy (Mises Inst.)

Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP). The Chinese people created more goods and had more purchasing power with which to obtain them – a classic sign of prosperity. At the same time, the Shanghai Stock Exchange more than doubled in value since October of 2014. This explosion in growth was accompanied by a post-recession construction boom that rivals anything the world has ever seen. In fact, in the three years from 2011 – 2013, the Chinese economy consumed more cement than the US had in the entire 20th century. Across the political spectrum, the narrative for the last fifteen years has been that of a rising Chinese hyperpower to rival American economic and cultural influence around the globe.

China’s state-led “red capitalism” was a model to be admired and even emulated. Yet, here we sit in 2015 watching the Chinese stock market fall apart despite the Chinese central bank’s desperate efforts to create liquidity through government-backed loans and bonds. Since mid-June, Chinese equities have fallen by more than 30 percent despite massive state purchases of small and mid-sized company shares by China’s Security Finance Corporation. But this series of events should have surprised nobody. China’s colossal stock market boom was not the result of any increase in the real value or productivity of the underlying assets. Rather, the boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.

Like the soaring Chinese stock exchange, the unprecedented construction boom was financed largely by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built not by private creditors and entrepreneurs marshaling limited resources in order to satisfy consumer demands. They were built by a cozy network of central bank officials, politicians, and well-connected private corporations.

Nearly seventy million luxury apartments remain empty. These projects created an epidemic of “ghost cities” in which cities built for millions are inhabited by a few thousand. At the turn of the century, the Chinese economy had outstanding debt of $1 trillion. Only fifteen years and several ghost cities later that debt has ballooned to an unbelievable $25 trillion. What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.

“The only way Beijing can support its currency is to sell foreign exchange, in most cases the dollar. Reporting by the FT at the end of August suggested that China was selling dollars at the rate of about $20 billion a day for this purpose..”

• China Imposes New Capital Controls (Chang)

The State Administration of Foreign Exchange, China’s foreign exchange regulator, has imposed annual limitations on cash withdrawals outside China on China UnionPay bank cards, the Wall Street Journal learned on Tuesday. The limitations are reportedly contained in a circular SAFE, as the regulator is known, sent to banks. Cardholders, under the new rules, may withdraw a maximum 50,000 yuan ($7,854) in the last three months of this year and a maximum 100,000 yuan next year. Because UnionPay processes virtually all card transactions in China, the new limits apply to all Chinese credit and bank cards. Beijing already imposes a 10,000-yuan daily limit on withdrawals.

And why should the rest of the world care about how much money a holder of a Chinese credit card can get from an ATM in, say, New York? The new rules could be the first in a series of measures leading to draconian prohibitions of transfers of money from China. Draconian prohibitions, in turn, could spark a global panic. Capital has been flowing out of China at a fast pace for more than a year, but the rate has been accelerating recently. In August, for instance, the country’s official foreign exchange reserves dropped by a stunning $93.9 billion according to SAFE, the biggest fall on record. Some analysts, however, had expected Beijing’s cash hoard to plunge by $150 billion, and it’s possible SAFE has underreported the outflow to avoid creating alarm.

Yet it’s hard for Chinese leaders to mask the situation. Wind Information, China’s leading financial data provider, says money is coming out of the country at the rate of $135 billion a month, net of inflow. That assessment appears more or less correct. Capital outflow in August, according to Bloomberg, was a record $141.7 billion, which topped July’s record of $124.6 billion. Goldman Sachs puts the August outflow at $178 billion. The global financial community has been focusing on the wrong crisis in China. Beijing’s efforts to prevent the collapse of equity values by massive purchases of stocks have received wide publicity since early July, but these purchases do not pose an immediate challenge to China’s technocrats.

They are, after all, using their own currency to acquire shares, and they can print as much of it as they like, especially because the country is in a general deflationary era. What is critical however, is Beijing’s defense of the renminbi. The People’s Bank of China, the central bank, began devaluing the currency on August 11th in a move that continues to puzzle observers. In any event, the devaluation triggered a run. Chinese officials, therefore, had to mount a heroic defense of the renminbi. The only way Beijing can support its currency is to sell foreign exchange, in most cases the dollar. Reporting by the Financial Times at the end of August suggested that China was selling dollars at the rate of about $20 billion a day for this purpose. At that “burn” rate, Beijing could use up all its foreign exchange reserves in a year.

“BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz are under scrutiny from the US regulator that exposed Volkswagen’s manipulation of emissions tests.”

• VW Scandal Deepens As France And Italy Launch Deception Inquiries (Guardian)

The Volkswagen emissions-testing scandal is deepening, with authorities in France and Italy launching investigations into the embattled German carmaker. Italy’s competition regulator is to investigate whether VW engaged in “improper commercial practices” by promoting its vehicles as meeting emissions standards which it failed to reach without a “defeat device”. The inquiry involves Volkswagen, Audi, Seat and Skoda diesel vehicles sold between 2009 and 2015. VW has suspended the sale of affected vehicles in Italy and also said it will recall more than 650,000 vehicles in the country. In France, an official from the prosecutor’s office told Reuters that an inquiry had been opened, and the French magazine L’Express said this had been launched at the instigation of Pierre Serne, vice-president of the region Île-de-France responsible for transport.

It also emerged on Friday that other car manufacturers – BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz – are under scrutiny from the US regulator that exposed Volkswagen’s manipulation of emissions tests. The EPA has broadened its investigation to include at least 28 diesel-powered car models made by those companies, according to the Financial Times. VW has admitted to the US regulator that it fitted up to 11m vehicles with software that manipulates the tests. Its chief executive, Martin Winterkorn, has stepped down and is facing a criminal investigation in Germany, along with other, unnamed, employees of the carmaker.

The EPA will initially test one used vehicle of each model and then widen the enquiry if it finds anything suspicious, a senior agency official close to the investigation told the FT. The investigation will include most of the diesel vehicles on US roads, such as BMW’s X3, Chrysler’s Grand Cherokee, GM’s Chevrolet Colorado, the Range Rover TDV6 and the Mercedes-Benz E250 BlueTec. Diesel engines make up a tiny proportion of the overall car market in the US, but are far more common in Europe.

German journalists are digging deeper, and it will be that much harder to bury the scandal.

• Volkswagen: Full Chronology of The Scene of the Crime (Handelsblatt)

Volkswagen, the world’s largest automaker, has been brought to its knees by the emissions cheating scandal. The company’s share price has been virtually halved, its reputation is in tatters, customers are furious and employees are distraught. Handelsblatt pieces together the events that led up to the scandal, based on the facts as they are currently known. The following chronology is based on the work of six reporters and correspondents, who analyzed corporate documents and spoke to many of the people involved.

Chapter 1: The Big Plan is Hatched in Wolfsburg

February 2005 – Wolfgang Bernhard becomes head of the group’s core VW brand and, with the help of CEO Bernd Pischetsrieder, begins developing a new engine that will work with “common rail injection.” The new engine is to be used above all in the United States, where VW wants to start growing again. The group hopes that diesel engines, which are more economical and accelerate quickly, will help it gain ground against U.S. and Japanese rivals. There is one problem, however: The U.S. authorities have the strictest environmental standards.

May 2005 – Mr. Bernhard entrusts the new project to Rudolf Krebs, a developer at VW’s Audi brand. It quickly becomes apparent that it will be impossible to comply with U.S. emissions standards using current technology. Their solution is “adblue,” a technology used by German carmaker Daimler. Developers at VW and Audi are strongly opposed to the use of “adblue” in the planned engine, which later will come to be known as the EA 189, the engine containing the emissions cheating device. Mr. Bernhard is undeterred and presses on with plans for the new engine to incorporate “adblue” and common rail injection.

Fall 2006 – The first prototype is tested in South Africa. Martin Winterkorn, the head of Audi, and Ferdinand Piëch, the chairman of the VW group’s supervisory board and a major shareholder, are reported to have been present, but are not said to have been impressed.

November 11, 2006 – It emerges that Daimler and the VW group will offer diesel cars in the United States under the joint label “Bluetec.”

Chapter 2: The Plan Takes Shape in Wolfsburg

January 7, 2007 – VW subsidiary Audi launches its diesel offensive in the United States at the Detroit Motor Show. It is the first German manufacturer to do so. Wolfgang Bernhard does not attend the show, which surprises journalists. It soon emerges that he is to leave the company at the end of January, after less than two years in his post.

Finally we find out who’s been sacked. But that doesn’t mean the right people have been.

• VW Tsunami: Falsified Emissions Push Company to Limits (Spiegel)

Since Sept. 20, when then-CEO Martin Winterkorn admitted that VW had cheated for years on emissions tests with the help of illegal software, Europe’s largest automobile company has been in crisis mode. Company managers don’t know what tasks to handle first. “It’s like we have been hit by a tsunami,” says one VW manager. Company attorneys have been overwhelmed by inquiries from national authorities on both sides of the Atlantic and by lawyers who have been notifying the company with threats of lawsuits. Beyond that, financial experts have to develop plans in case the company’s ratings fall, which would increase borrowing costs. And sales managers have to come up with promotions to help dealerships sell cars. Diesel models are currently extremely difficult to move off the lot without significant rebates.

And then there is the company investigation that hopes to quickly discover how the scandal could have happened in the first place and who was responsible. Because development of the diesel engine in question began back in 2005, documents, records and emails from the last 10 years have to be examined. But those involved in the investigation have also received clues from the press – for example, the fact that Bosch, a VW supplier, warned Volkswagen early on against using the emissions software in question. But the VW investigation team was unable to find a message to that effect in company records. They contacted Bosch with a request to please send a copy to company headquarters in Wolfsburg.

Four managers who were responsible for the development of engines or vehicles have thus far been suspended. Their experiences were similar to that of Audi board member Ulrich Hackenberg, a long-time confidant of Winterkorn’s and, up until just a few days ago, one of the most powerful men at VW. He received news of his immediate suspension from the personnel department and was asked to turn in his company phone and leave his office. He has also been told not to set foot on company premises. Wolfgang Hatz and Heinz-Jakob Neusser, the heads of R&D for Volkswagen and Porsche respectively, suffered similar fates. In the case of Neusser, there is probable cause: A company employee allegedly told him back in 2011 about the use of the forbidden emissions software.

The moves are vital, as the company seeks to find out what went wrong and begins what promises to be a long process of restoring its reputation. Some of the suspended managers, to be sure, are likely to be reinstated once it is proven that they had nothing to do with the implementation of the software in question. But for the moment, the development of new models at Volkswagen and its affiliates has come to a screeching halt. The old bosses are gone, new ones have yet to be named and projects cannot go forward. That, though, is a small price to pay in comparison to what likely lies ahead. New VW CEO Müller, who was head of Porsche prior to his promotion, has demanded an “unsparing and vigorous investigation.” But with the company’s very existence at risk, even that may not be enough.

How long is this going to take?

• VW Emissions Cheating Scandal Heading To US Congress (CNBC)

Two weeks after revealing that Volkswagen had cheated on diesel emissions tests, officials from the EPA still have not formally ordered a recall of 482,000 VW products, but that step is “likely” to take place, according to an EPA spokesperson. Sources inside Volkswagen, meanwhile, told TheDetroitBureau.com that the automaker is now working with the federal agency to come up with an acceptable fix for diesel models that can produce as much as 40 times the allowed level of pollutants such as smog-causing NOx. VW has already said it is developing a retrofit for a total of 11 million diesel vehicles sold worldwide that contained a secret “defeat device” designed to reduce emissions levels during testing.

VW’s problems have continued to escalate in recent days, and even as prosecutors in both the U.S. and Germany look into the scandal, the automaker’s top U.S. executive has been summoned to Capitol Hill, where he will testify before a congressional oversight panel on Oct. 8. “The American people want to know why these devices were in place, how the decision was made to install them, and how they went undetected for so long. We will get them those answers,” said Rep. Tim Murphy, the Pennsylvania Republican who serves as chairman of the Energy and Commerce Subcommittee on Oversight and Investigations. The hearing will come less than a month after the EPA announced that Volkswagen had secretly added software code to its digital engine controllers designed to rein in emissions during testing.

But in the real world, the nearly half-million diesel vehicles sold in the U.S. over the last seven years were allowed to produce significantly higher levels of pollution than allowed by federal standards. The scandal threatens to consumer the automaker, with potential fines of more than $18 billion from the EPA alone. VW could face additional penalties resulting from the Justice Department investigation, as well as possible criminal sanctions. And the maker has been hit with a number of class-action lawsuits alleging, among other things, that it defrauded customers. September numbers released by VW on Thursday show that the maker did gain about 1% in sales compared to the same month a year ago. But the overall industry saw a 16% jump in volume for September. And since the scandal only hit mid-month, many analysts believe VW could be hit even harder in October.

When -cheating- carmakers get into banking. As if GM’s experiences haven’t been bad enough. Oh wait, GM’s still propping up US cars with cheap loans.

• VW Financial Services Arm A Risk Investors May Be Overlooking (CNBC)

Volkswagen may be an even bigger risk for investors than previously thought, as a key part of its business – aside from making cars – is threatened by the diesel emissions scandal. The company’s financial services business, which gives consumers loans to buy its cars and accounts for close to half of its balance sheet, could be the next source for alarm, according to analysts at Credit Suisse. The previously successful business – which currently has more than €100 billion of outstanding loans to customers – may even need fresh capital, the analysts argue. “We increasingly see risk in VW’s Financial Services business which supported industrial growth in the past.

Higher refinancing costs and risk provisioning makes it difficult for the financial services business to fund itself going forward; thus a capital injection would likely be required unless growth is reduced materially,” Credit Suisse wrote in a research note Friday morning. In other words, the woes of the manufacturing arm of the business are likely to affect the financial services’ ability to borrow to fund its operations. VW’s borrowing costs, measured by its bond yields, are already up by 200 basis points since the company admitted lying about diesel emissions in mid-September. If it is more difficult to get a loan to buy a Volkswagen as a result, the number of consumers wanting to buy its cars may dwindle even further.

But NDP is not high in the polls. On the brighter side, Harper’s not winning either. The liberals were a mess, but Stephen has been a calamity.

• Canada Opposition Warns TPP Deal Not Binding Ahead Of Imminent Election (G&M)

NDP Leader Thomas Mulcair is serving notice that a New Democratic Party government would not consider itself bound by the terms of a major Pacific Rim trade deal which the ruling Conservatives are negotiating on behalf of Canada in Atlanta. The NDP’s hardening of position on the Trans-Pacific Partnership talks comes as the deal appears likely. Discussions in Atlanta have gone into overtime as countries clear obstacles such as how much foreign content should be allowed in Japanese-made cars and Asian auto parts entering North America. Sources said Prime Minister Stephen Harper is being regularly briefed on developments as talks between 12 countries from Chile to Japan enter what is expected to be their final phase. Mr. Mulcair said Friday, however, that he feels the Conservative government has no mandate to agree to the big changes that a TPP deal would bring about.

His bombshell declaration on Friday promises to make the massive trade agreement a bigger factor in Canada’s 42nd federal election, which is 2 1/2 weeks away. It comes as polls suggest the NDP has dropped to third place in the national race. The new marker laid down by the NDP on a potential TPP deal sets it apart from the Conservatives, who favour a deal, and the Liberals, who have focused most of their criticism on the manner in which the Tories have negotiated the agreement rather than its substance. The NDP is trying to consolidate the anti-TPP vote with this move. Mr. Mulcair laid out his reasons in a letter to International Trade Minister Ed Fast, the Conservative government’s point man on the TPP talks, listing a slew of reasons why he’s distancing himself from the agreement, including the expected pain it will bring to Canadian dairy farmers and smaller auto parts makers.

“Your government forfeited a mandate to conclude negotiations on a major international trade agreement the day the election was called,” he writes. The letter also throws into question what would happen should the Conservatives lose power in the Oct. 19 election. “As you participate in Trans-Pacific Partnership negotiations this week in Atlanta, I wish to advise you that an NDP government will not consider itself bound to any agreement signed by your Conservative government during this federal election,” Mr. Mulcair says. He says a caretaker government like the one now running Ottawa during an election campaign is supposed to step carefully and ensure Canada’s interests are “vigorously defended” in Atlanta.

Well put: “Going down under”.

• Australia Is “Going Down Under”: “The Bubble Is About To Burst”, RBS Warns (ZH)

[..] just because other vulnerable countries aren’t beset with ethnic violence and/or street protests doesn’t mean they too aren’t facing crises due to falling commodity prices and the slowdown of the Chinese growth machine. One such country is Australia, which in some respects is an emerging market dressed up like a developed economy, and which of course has suffered mightily from the commodities carnage and China’s transition away from an investment-led growth model. Out with a fresh look at the risks facing Australia is RBS’ Alberto Gallo. Notable excerpts are presented below. From RBS:

Australia has become a commodity focused economy, with an increasing exposure to China. For the past decades, Australia has been buoyed by the rapid Chinese expansion, which outpaced the rest of the world. Australia benefited from China’s strong demand for commodities given its investment-led growth model. China is Australia’s top export destination and 59% of those exports are in iron-ore. But as China struggles to manage its ongoing credit crunch and continues its shift to consumption-led growth Australia’s economy is likely to be hurt by lower demand for commodities. The economy is slowing due to external headwinds. Last quarter, Australian GDP grew at just 0.2% QoQ, its lowest level in the last three years (and below the market consensus of 0.4%).

According to the Australian Bureau of Statistics (ABS) the growth rate was driven by higher domestic demand, while lower exports and a declining mining industry continue to present headwinds. Mining’s gross value-added to GDP fell by – 0.3% QoQ in Q2. Despite Reserve Bank of Australia (RBA) governor, Glenn Stevens, citing lower growth as potentially a “feature of the post financial crisis world” meaning that “potential growth is a bit lower”, Australia’s slowing economy is more than just a victim of the post financial crisis world, in our view. Rising unemployment coupled with soaring house prices and vulnerabilities in the commodity and construction sectors are all cause for concern. Unemployment is rising, and could increase further, given the high proportion of employment in the vulnerable mining and construction sectors.

Unemployment is at 6.2%, just shy of the ten year high of 6.3%. Although the number itself is not worryingly high, unemployment has been rising for the last three years, and is likely to continue in our view. Mining and commodity sectors employ 4.5% of the workforce. With lower demand for commodities from China, unemployment in these sectors could rise. Also, unemployment may rise in the construction sector (8.9% of workforce) given vulnerabilities in the housing market. There are domestic headwinds, too. The housing market is vulnerable, with overvalued properties and over-levered households. House prices in Australia have risen by 22% in the last three years, with property prices in Sydney overtaking those in London. House prices have risen faster than both disposable income and inflation in recent years, with the gap between growth in house prices and household income closing by over 40% in the last three years.

Like oil.

• Half of World’s Coal Output Is Unprofitable (Bloomberg)

Half of the world’s coal isn’t worth digging out of the ground at current prices, according to Moody’s Investors Service. The global metallurgical coal benchmark has fallen to the lowest level in a decade, settling last month at $89 a metric ton. “Further production cuts are necessary to bring the market back into balance,” Moody’s analysts including Anna Zubets-Anderson wrote in a report on Thursday. China’s slowing appetite for the power-plant fuel and steelmaking component has depressed the seaborne market, creating a worldwide glut. In the U.S., cheap natural gas is stealing coal’s share of the power generation market. And the strong dollar has tempered exports.

In North America, the credit rating company said it expects the industry’s combined earnings before interest, taxes, depreciation and amortization to decline by 10% next year after a 25% plunge in 2015. The Illinois Basin stands to be the “most resilient to current market dynamics” because of its lower mining costs and its location in the middle of the country where power plants still burn the fuel, Moody’s said. “We believe that Foresight Energy, a producer concentrated in the region, will be able to maintain steady production volumes over the next two to three years,” Zubets-Anderson wrote.

Armstrong swims in dark waters.

• From Here On Out, This Is Not A Video Game – This Is Real (Martin Armstrong)

The unleashing of Russian firepower in Syria in support of the Syrian government came precisely on the day of the Economic Confidence Model. I have come to learn from observing this model that major world events, whatever the major focus may be, appear to line up with the ECM. This target has been huge for us given that we have TWO WAR CYCLE MODELS: (1) civil unrest that leads to revolution, and (2) international war. It is sort of like the Blood Moon stuff insofar as it does not line up so easily. The main convergence of the War Cycle between both models began to turn in 2014. The economic war against Russia imposing sanctions began on March 6, 2014 (2014.178) when Obama signed Executive Order 13660 that authorizes sanctions on individuals and entities responsible for violating the sovereignty and territorial integrity of Ukraine.

The next day, this order was followed by Executive Order 13661, which claimed that Russia had undermined the democratic processes. On March 20, 2014, Obama issued a new Executive Order: “Blocking Property of Additional Persons Contributing to the Situation in Ukraine”. This order expanded the scope of the two previous orders to the Government of the Russian Federation; it included its annexation of Crimea and its use of force in Ukraine, which the U.S. claimed was a threat to the national security and foreign policy of the United States. Then on April 28, Obama imposed more sanctions on Russia. The third round of U.S. sanctions on Russia began from October into December 2014 over the turning point. On October 3, 2014, Joe Biden said, “It was America’s leadership and the president of the United States insisting, oft times almost having to embarrass Europe to stand up and take economic hits to impose costs.”

The EU imposed sanctions on December 18, 2014, which banned some investments in Crimea and halted support for the Russian Federation Black Sea exploration of oil and gas. The EU sanctions also prevented European companies from offering tourism services and purchasing real estate or companies in Crimea. On December 19, 2014, Obama imposed sanctions on Russian-occupied Crimea by executive order, which prohibited exports of U.S. goods and services to the region. The actual turning point was 2014.8871: November 20, 2014. The one event that took place precisely on that day was the Supreme Court’s ruling to allow same-sex marriage in South Carolina. This decision sparked civil unrest against the government throughout the Bible Belt states. On that same day, Obama took executive action on immigration. On November 24, the Missouri Grand Jury made ruled not to indict Officer Wilson in the shooting of Michael Brown on August 9, which sparked the beginning of civil unrest, such as the Black Lives Matter movement, in a rebuke of corrupt police forces.

Is there any sense of humanity left in Britain? These few thousand people can obviously be of much more value than an equal number of fat Brits.

• Channel Tunnel Closed As Migrants Occupy Complex (AFP)

Traffic through the Channel Tunnel connecting Britain and France was suspended early this morning after around 100 migrants entered the French side of the tunnel complex, the company operating it said in a statement. “At around 12:30 am, around 100 migrants forced a closure and the entry of security agents into the tunnel,” a Eurotunnel spokeswoman told AFP. She said police were at the site and that traffic remained suspended. Ten people, including seven migrants, suffered minor injuries in the storming of the tunnel, a firefighter at the scene said.

The interior ministers of France and Britain in August signed an agreement to set up a new “command and control centre” to tackle smuggling gangs in Calais, as Europe grapples with its biggest migration crisis since World War II. It came after attempts to penetrate the sprawling Eurotunnel site spiked that month, with migrants trying several times a night to outfox hopelessly outnumbered security officials and police. Thousands of people from Africa, the Middle East and Asia are camped in Calais in slum-like conditions, and at least 13 have died since 26 June trying to cross over into Britain, where many have family and work is thought easier to find.

Count on more.

• UN Refugee Agency: Over 1.4 Million To Cross Mediterranean To Europe (Reuters)

The UN refugee agency expects at least 1.4 million refugees to flee to Europe across the Mediterranean this year and next, according to a document seen by Reuters on Thursday, a sharp rise from initial estimates of 850,000. “UNHCR is planning for up to 700,000 people seeking safety and international protection in Europe in 2015,” reads the document, a revision to the agency’s existing appeal for funds. “… It is possible that there could be even greater numbers of arrivals in 2016, however, planning is based for the moment on similar figures to 2015.” UNHCR launched the appeal on Sept. 8 with preliminary plans for 400,000 refugee arrivals in 2015 and 450,000 in 2016. But the 2015 figure was surpassed within days of its publication, and by Sept. 28, 520,957 had arrived.

The revised appeal totals $128 million, a sharp increase from the initial appeal for $30.5 million, and UNHCR asked donors to allow their funds to be allocated flexibly because of the “very volatile operational context”. The appeal is also broadened to include transit countries in the Middle East and North Africa, to enable refugees to get help from UNHCR at an earlier stage of their journey. Although the vast majority of recent arrivals have travelled from Turkey through Greece, Macedonia and Serbia, possible alternative routes mapped out by UNHCR include the sea route from Turkey to Italy, from Greece through Albania to Montenegro or Italy, and from Montenegro by boat to Croatia. Most are fleeing the Syrian civil war, with many others seeking to escape conflict or poverty in Iraq, Afghanistan, Africa or elsewhere.

Sucking Spoilt Milk From A Bloated Dead Sow

May 032015

May 3, 2015 Posted by Raúl Ilargi Meijer at 1:21 pm Finance Tagged with: democracy, investors, markets, one-dimensional, propaganda, recovery 5 Responses »

Jack Delano Near Shawboro, North Carolina, Florida migrants on way to Cranberry, NJ 1940

With US GDP growth ‘officially’ back where it belongs, in the Arctic zone close to freezing on the surface but much worse in real life, for reasons both Albert Edwards and Ambrose Evans-Pritchard (not exactly a pair of Siamese twins) remarked this week; that is, excluding the “biggest inventory build in history, the economy contracted sharply”, it’s time for everyone to at long last change the angle from which they view the world, if not the color of their glasses.

But ‘everyone’ will resist, refuse and refute that change, leaving precious few people with an accurate picture of the – economic – world. Still, for you it’s beneficial to acknowledge that very little of what you read holds much, if any, truth or value. This is true when it comes to politics, geopolitics and economics. That is, the US is not a democracy, it is not the supreme leader of the world, and the American economy is not in recovery.

Declining business investment, a record inventory build and extreme borrowing to hold share prices above water through buybacks, it all together paints a picture of a very unhealthy if not outright dying economy, and certainly not one in which anything at all is recovering. But how are you supposed to know?

The entire financial media should change its angle of view, away from the recovery meme (or myth), but the media won’t because the absurd one-dimensional focus on that perpetuated myth is the only thing that makes the present mess somewhat bearable, palatable and, more importantly, marketable, to the general public.

This has the added simultaneous benefit of keeping that same general public from understanding how sinister the myth really is; it can only be upheld by greatly increasing the debt levels which burden their shoulders, in hidden ways. If the media can no longer keep the consequences of the debt increases hidden, the game is up.

And there are undoubtedly many people who find it more important right now to profit from the whole scale distortion by central banks of what were once the financial markets, than they find it to know the truth and understand the system they owe their gains to. But that may no be all that smart; they risk losing their gains again overnight. You can’t rely on what you don’t understand. So here are a notes:

1 – There are no markets anymore (and therefore no investors either).

There are ways to make money, but that’s not the same thing. Markets must of necessity reflect – the performance of – underlying economies, and to even pretend today’s markets do that is preposterous. Financial markets these days exclusively reflect central banks’ pumping money into their respective bankrupt banking systems, a practice poetically known as QE. Markets need to be functional in order to be called markets and if they don’t we should find another term to label them with.

Or, in other words, present day western economies – and their former markets – are being artificially propped up by either making already poor people poorer today, making them poorer tomorrow, or both. It’s the only way left to make things look passable. And those who still desire in these non-markets to call themselves ‘investors’ are merely little piglets sucking spoilt milk oozing from the teats of their mother sow’s long-dead bloated corpse.

2 – You have no idea what anything is truly worth.

Central bank stimulus across the globe has fully demolished price discovery. And whether you like it or not, financial markets can not and do not function without it. Lots of people try to make us believe that central bank announcements have momentarily taken the place of price discovery, but that is nonsense. And if you don’t know what any asset is really worth, how can you be sure you want to own it other than for myopic short-term reasons?

3- There is no recovery now, and there’s not one around the corner.

The weight of our debt, just to name one thing, has kept us from turning that corner for 7-8 years now, and the weight is getting more forbidding, not less. Publishing falling unemployment numbers while out-of-labor-force data rise (to a record 93 million working age Americans today) is an insult to everyone’s intelligence, not a sign of economic health. Whatever is seen as recovery or expansion is a testament to the power of illusion and propaganda, not the power of the economy. If you choose to look at the world from a point of view that focuses only on recovery, you’re not going to understand what is happening, because there is no recovery anywhere in sight.

4- You can’t trust anything your government and media say.

The entire apparatus is geared towards selling you a doctored image of the world you live in, instead of presenting you with reality. Not because as Jack Nicholson said “You can’t handle the truth”, but because you knowing the truth is not in the interest of those who run governments, nations and supranational organizations. You’re caught in a trap somewhere between Goebbels and Orwell, and it takes a lot of energy to escape it, energy you will be inclined and tempted to instead use to improve your position inside the trap. Just like everyone else does. We are social animals, we are disposed to do as those around us do.

As I said above, you can’t trust anything you hear or read about politics, geopolitics and economics:

• The US is not a democracy. You can’t have a democracy and SuperPacs at the same moment. For the hundredth time: if you allow money into your political system, it will end up buying the entire system. And if you allow endless amounts of money to enter it, that process is greatly accelerated.

• The US is not the supreme leader of the world. Today’s world doesn’t allow for a supreme leader. Neither does it need one. Countries like Russia and China will not tolerate American supremacy to dictate what they do. Not economically, and not militarily. This is very hard to stomach for parts of American society, but they’re going to have to get used to it. Going to war over these issues is pointless. Unfortunately, it increasingly looks like the entire globe will have to find that out the hard way. The very hard way.

• The American economy is not in recovery. I already mentioned the creative jobs numbers accounting. Also, without Fed intervention, asset prices (bonds, stocks, real estate..) would be much lower. This would have been a lot healthier for everyone, except for banks and their shareholders. But once QE is unleashed, there is no smooth exit possible. It will need to continue until it self-implodes.

At present, Japan is leading the way to economic self-immolation, but the US and Europe must inevitably follow. The only thing that helps is what the banks most resist: restructuring, cutting the leverage from the debt. But all we get is fantasy stories about how the crisis was left behind. Stories that of course all 42 million or so Americans on foodstamps and tens of millions of otherwise underpaid can confirm. Why am I even trying to show that, and why, there is no recovery?

We need to start thinking from the perspective of what we can and must do if and when that elusive and illusionary recovery is not going to happen. Decisions made from that point of view will substantially differ from those taken in order to ‘produce’ the recovery, which is the only perspective that exists in politics, media and indeed the minds of 99% of the population today.

We need to think about how we’re going to lay a foundation, as solid as we can, under our societies now, with the means we still possess to achieve that, knowing there will be times when those means will be increasingly less available. We’re not doing that, because we focus only on a world that does manage to attain a recovery. We truly think the world is one-dimensional.

Which is why, among other things, we strive to make individuals richer, and fail to see that this makes communities and societies poorer. Everything seems fine as long as we deny the bigger picture, and because we like things to look fine, we stick to that one dimension of our world that is ourself. And ignore each other.

Debt Rattle March 25 2015

Mar 252015

March 25, 2015 Posted by Raúl Ilargi Meijer at 7:39 am Finance Tagged with: AIIB, antibiotics, conspiracy, fascists, investors, jobs, Monsanto, NATO, Obama, World Bank Comments Off

William Henry Jackson Jupiter & Lake Worth R.R., Florida 1896

• The Long-Distance Relationship Between Americans and Jobs (WSJ)

• American Cash Is Flooding Into European Stocks (CNN)

• Bank of Canada, Government and Others Face Lawsuit for IMF Conspiracy (Epoch T.)

• ECB Said to Limit Greek Lenders’ Treasury-Bill Holdings (Bloomberg)

• Greeks Celebrate Independence as EU Creditors Discuss Their Fate (Bloomberg)

• Next Task For Tsipras Is To Convince His Party (Kathimerini)

• Greece: Fascists At The Gate (Hallinan)

• China’s Influence Poised To Climb In Revamp Of Postwar Order (Bloomberg)

• The New Chinese Dream (Pepe Escobar)

• Gulf Should Be More Worried About Yemen Than Oil (CNBC)

• Oil Stand-Off In Ukraine Shows Oligarchs Won Maidan Revolution (Sputnik)

• Fiscal Virtue And Fiscal Vice – Macroeconomics At A Crossroads (Skidelsky)

• Pension Funds Seek Shelter From Dollar’s Rise (WSJ)

• Brazil Investigates Deficit-Ridden Pension Fund (Bloomberg)

• Money May Make The World Go Round, But At What Cost? (BBC)

• Obama Snubs NATO Chief as Crisis Rages (Bloomberg)

• Paulson and Warren: The Unlikely Twin Towers of Dodd-Frank (Bloomberg)

• Presidents, Bankers, the Neo-Cold War and the World Bank (Nomi Prins)

• Financial Feudalism (Dmitry Orlov)

• Antibiotics In Meat Rising Fast Worldwide, Especially Bacon (UPI)

• Monsanto Bites Back at Roundup Findings (WSJ)

3 trillion kilometers driven last year.

• The Long-Distance Relationship Between Americans and Jobs (WSJ)

For more Americans, jobs are moving out of reach, literally. The number of “nearby jobs”–jobs within a typical commute for residents in a major metropolitan area–dropped 7% between 2000 and 2012, according to a new study of census data by Elizabeth Kneebone and Natalie Holmes of the Metropolitan Policy Program at the Brookings Institution. Minorities and poor Americans, who have moved to the suburbs in droves, fared worse. The number of nearby jobs fell 17% for Hispanic residents and 14% for blacks over this time period, compared with a drop of 6% for whites. Typical poor residents saw a drop in job proximity of 17%, versus 6% for the nonpoor. The growing distance between Americans and job opportunities is a discouraging trend amid what’s become the strongest job creation in two decades.

Last month, U.S. employers added a seasonally adjusted 295,000 jobs, the 12th straight month of 200,000-plus net job creation. That’s the best streak since 1995. Most of those jobs are full-time. (In 2012, where the Brookings analysis ends, overall U.S. employment in America’s largest metros was about 2% higher than in 2000, following the Great Recession’s catastrophic job losses.) But what matters for Americans’ employment prospects isn’t just the number of job opportunities, or even how “good” they are, but where they are. People near jobs are more likely to work, and have shorter job searches and periods of joblessness—especially black Americans, women and older workers, Brookings says. Among the poor, being near a job increases the chances of leaving welfare.

The world gets more distorted by the day.

• American Cash Is Flooding Into European Stocks (CNN)

American cash is pouring into European stocks. Last week alone, U.S.-based funds sent a record amount -$3.9 billion – into Europe equities. That’s according to EPFR Global, a research firm that tracks fund flow data. “The trend is definitely accelerating,” says Cameron Brandt, director of research at EPFR. U.S. investments going to Europe thru mid-March have already outpaced February’s total and are triple the size of January’s figure. Here’s why investors are flocking to Europe:

• Europe’s stock success: It’s no secret that European stocks are hot right now. Since the ECB announced its stimulus plan for the continent in January, markets have surged. The STOXX index (SXXL) is up 16% this year while Germany’s DAX has risen 21% in 2015. Markets in Belgium, Sweden and even Spain – yes, Spain! – are doing great so far too. That’s a lot better than the U.S. markets, which are up just over 1% so far this year. As U.S. stocks look pricey, investors see more upside potential across the pond.
“It’s time for Europe to play catch up,” says Kevin Kelly at Recon Capital. “That’s why you’re seeing investors and funds flow into Europe.”

The stimulus plan has weakened the value of the euro, and at the same time the U.S. dollar is gaining value. The euro has rallied a bit this week, but it’s still near 12-year lows. Many believe the dollar and euro could be equal later this year. The currency situation makes European companies more attractive to investors because their products are cheaper to sell than American companies’ products. European exports are on the rise, and the eurozone economy is showing signs of a pick up.

• Expect the trend to continue: The flood of money into Europe is unlikely to stop any time soon. Sixty-three% of fund managers want to invest more in Europe this year, according to the most recent BofA Merrill Lynch fund manager survey. That’s the highest rate since 2001. One of the hot-ticket items right now for investors is exchange-traded fund (ETF) that own European stocks. Investment in those ETFs so far this year has doubled compared to the same time a year ago, according to BlackRock.

Intriguing.

• Bank of Canada, Government and Others Face Lawsuit for IMF Conspiracy (Epoch T.)

It would be easy to assume the people suing the Queen of England, the Bank of Canada, and three ministers for a conspiracy against “all Canadians” wear tinfoil hats. They don’t. They may be conspiracy theorists, but they are also intelligent, thoughtful people who have a lawyer with a history of winning unlikely cases. And despite the government’s best efforts to have this case thrown out, it’s going ahead after winning an appeal that overturned a lower court’s ruling to have it tossed and surviving a follow-up motion to have it tossed again. The government has one more chance to have it thrown out through an appeal at the Supreme Court, but that has to be filed by Mar. 29 and that looks unlikely. That means the Committee on Monetary and Economic Reform (COMER) is going to have its day in federal court.

This little think-tank alleges that the Bank of Canada, the Queen, the attorney general, the finance minister, and minister of national revenue are engaging in a conspiracy with the International Monetary Fund (IMF), the Financial Stability Board (FSB), and the Bank for International Settlements (BIS) to undermine Canada’s financial and monetary sovereignty. No major media have covered this story. That could be because of the powerful vested interests the suit targets, as Rocco Galati, the lawyer trying the case, suggests. Or it could be because there are parts of the statement of claim that read like they were pulled from the dark corners of some Internet conspiracy forum. They weren’t. These are serious people with wide knowledge of the financial and monetary system. And their lawyer is no slouch.

Dangerous games.

• ECB Said to Limit Greek Lenders’ Treasury-Bill Holdings (Bloomberg)

The ECB banned Greek banks from increasing holdings of short-term government debt, two people familiar with the matter said. The decision, approved by the ECB Governing Council, comes five days after the same body stalled a previous proposal by the institution’s supervisory arm, pending legal review. In the intervening days, Greek Prime Minister Alexis Tsipras met high-level euro-area officials, including ECB President Mario Draghi and German Chancellor Angela Merkel. Tsipras agreed to submit a comprehensive list of policy measures aimed at securing more financial aid from European partners.

Euro-area finance officials will hold a call on Wednesday to discuss progress on Greece, amid concerns that the country will run out of money by early April. The Governing Council decision makes previous supervisory recommendations legally binding, and reflects increasing concern at the ECB’s bank oversight body, the SSM, about Greek lenders’ exposure to the state and the accompanying default risk. The ban echoes decisions already made on the monetary policy side, such as a €3.5 billion limit on accepting Greek treasury bills as collateral, one of the people said.

Independence Day. But not a lot of independence.

• Greeks Celebrate Independence as EU Creditors Discuss Their Fate (Bloomberg)

Greeks celebrate their independence Wednesday with a military parade and a folk-music festival sponsored by the Ministry of Defense, as European officials more than 1,000 miles away review the financial aid that will shape their future. The ECB Governing Council will hold a weekly call to assess the Emergency Liquidity Assistance keeping Greece’s banking system afloat while euro-area finance ministry officials will have a separate discussion on the progress of the country’s economic policy program. Without access to capital markets, or the ECB’s normal financing operations, Greek banks rely on almost €70 billion of ELA to cover a financing shortfall exacerbated by steep deposit withdrawals.

While inspectors are gauging the case for continuing financial support for Europe’s most-indebted nation, many Athenians will be watching a parade of battle tanks and fighter jets to mark the beginning in 1821 of the war that won independence from the Ottoman Empire. The government of George Papandreou scaled down military parades to cut costs after the Greek debt crisis erupted in 2010. Fighter jets made a comeback to the skies of Athens last year at a cost of about €500,000, according to a defense ministry official from the previous administration.

With government cash supplies running out and negotiations on financial aid only inching forwards, European officials have said that Greece could default on its obligations within weeks unless there’s a breakthrough. The government has to pay about €1.5 billion of salaries and pensions by the end of March and Prime Minister Alexis Tsipras is at loggerheads with its creditors over the conditions attached to its emergency loans. Revenue from taxes also missed budget targets by about €1 billion in the first two months of the year, the country’s Ministry of Finance said Tuesday, further depleting cash buffers.

Will Syriza blow it all up?

• Next Task For Tsipras Is To Convince His Party (Kathimerini)

Returning from his official visit to Germany, one of Prime Minister Alexis Tsipras’s main tasks will be to ensure his party’s support for the reform list his government is compiling and preparing to send to lenders, possibly by the end of the week. Sources said that Tsipras will take it upon himself to convince SYRIZA members and MPs to back the reform plan, which should secure Greece the funding it needs to survive until the end of June, when the government will have to reach a new agreement with its lenders. The prime minister’s first port of call in this effort to sell the current package will be the party’s political secretariat. A meeting is expected to take place in the next few days.

This will be followed by a gathering of SYRIZA’s parliamentary group, where Tsipras will try to persuade the party’s 149 MPs to back the reforms when they come to Parliament. The content of the reform package is not yet known but the government is concerned that it will contain a number of items that will not go down well within SYRIZA. This could include the retention of the contentious ENFIA property tax for another year, albeit adjusted so that the less well-off pay less, as well as labor and pension reforms. The coalition has already sought to defuse any tension over privatizations by saying that it will only seek strategic partnerships that allow the state to retain a controlling majority.

An area of increasing friction is what the government plans to do with value-added tax. Lenders want the special 30% reduction on VAT enjoyed by islands to be scrapped. Alternate Finance Minister Nadia Valavani told ANT1 TV yesterday that one option might be to adopt regular VAT rates on the most popular islands, such as Santorini and Myconos. However, this runs counter to what government sources have been saying so far. It is believed the coalition is examining the option of adopting an across-the-board VAT rate of 15%, which means some goods will become cheaper and others more expensive, but with possible exceptions for some basic items such as medicines.

Next in line if Syriza fails?!

• Greece: Fascists At The Gate (Hallinan)

When some 70 members of the neo-Nazi organization Golden Dawn go on trial sometime this spring, there will be more than street thugs and fascist ideologues in the docket, but a tangled web of influence that is likely to engulf Greece’s police, national security agency, wealthy oligarchs, and mainstream political parties. While Golden Dawn—with its holocaust denial, its swastikas, and Hitler salutes—makes it look like it inhabits the fringe, in fact the organization has roots deep in the heart of Greece’s political culture Which is precisely what makes it so dangerous. Golden Dawn’s penchant for violence is what led to the charge that it is a criminal organization. It is accused of several murders, as well as attacks on immigrants, leftists, and trade unionists. Raids have uncovered weapon caches.

Investigators have also turned up information suggesting that the organization is closely tied to wealthy shipping owners, as well as the National Intelligence Service (EYP) and municipal police departments. Several lawyers associated with two victims of violence by Party members—a 27-year old Pakistani immigrant stabbed to death last year, and an Afghan immigrant stabbed in 2011— charge that a high level EYP official responsible for surveillance of Golden Dawn has links to the organization. The revelations forced Dimos Kouzilos, director of EYP’s third counter-intelligence division, to resign last September. There were several warning flags about Kouzilos when he was appointed to head the intelligence division by rightwing New Democracy Prime Minister Antonis Samaras.

Kouzilos is a relative of a Golden Dawn Parliament member, who is the Party’s connection to the shipping industry. Kouzilos is also close to a group of police officers in Nikea, who are currently under investigation for ties to Golden Dawn. Investigators charge that the Nikea police refused to take complaints from refugees and immigrants beaten by Party members, and the police Chief, Dimitris Giovandis, tipped off Golden Dawn about surveillance of the Party. In handing over the results of their investigation, the lawyers said the “We believe that this information provides an overview of the long-term penetration ands activities of the Nazi criminal gang with the EYP and the police.” A report by the Office of Internal Investigation documents 130 cases where Golden Dawn worked with police.

It should hardly come as a surprise that there are close ties between the extreme right and Greek security forces. The current left-right split goes back to 1944 when the British tried to drive out the Communist Party—the backbone of the Greek resistance movement against the Nazi occupation. The split eventually led to the 1946-49 civil war when Communists and leftists fought royalists and former German collaborationists for power.

What if a big recession hits?

• China’s Influence Poised To Climb In Revamp Of Postwar Order (Bloomberg)

Seven decades after the end of World War II, the international economic architecture crafted by the U.S. faces its biggest shakeup yet, with China establishing new channels for influence to match its ambitions. Three lending institutions with at least $190 billion are taking shape under China’s leadership, one of them informally referred to as a Marshall Plan – evoking the postwar U.S. program to rebuild an impoverished Europe. Also this year, China’s yuan may win the IMF’s blessing as an official reserve currency, a recognition of its rising use in trade and finance. China’s clout has been expanding for decades, as its rapid growth allowed it to snap up a rising share of the world’s resources, its exports penetrated global markets, and its bulging financial assets gave it power to make big individual loans and purchases.

Now, the creation of international lending institutions is leveraging that economic influence closer to the political and diplomatic arenas, as U.S. allies defy America to back China’s initiative. “This is the beginning of a bigger role for China in global affairs,” said Jim O’Neill, formerly at Goldman Sachs, who coined the term BRICs in 2001 to highlight the rising economic power of Brazil, Russia, India and China. Chinese President Xi Jinping’s vision of achieving the same great-power status enjoyed by the U.S. received a major boost this month when the U.K., Germany, France and Italy signed on to the Asian Infrastructure Investment Bank. The AIIB will have authorized capital of $100 billion and starting funds of about $50 billion.

Canada is considering joining, which would leave the U.S. and Japan as the only Group of Seven holdouts as they question the institution’s governance and environmental standards. Australian Prime Minister Tony Abbott’s cabinet approved negotiations to join too, according to a government official who asked not to be identified as the decision hasn’t been made public. “China’s economic rise is acting as a huge pull factor forcing the existing architecture to adapt,” said James Laurenceson, deputy director of the Australia-China Relations Institute in Sydney. “The AIIB has shown the U.S. that a majority in international community support China’s aspirations for taking on greater leadership and responsibility, at least on economic initiatives.”

It’s still all just printed Monopoly cash, Pepe.

• The New Chinese Dream (Pepe Escobar)

It’s no wonder top nations in the beleaguered EU have gravitated to the AIIB – which will play a key role in the New Silk Road(s). A German geographer – Ferdinand von Richthofen – invented the Seidenstrasse (Silk Road) concept. Marco Polo forever linked Italy with the Silk Road. The EU is already China’s number one trade partner. And, once again symbolically, this happens to be the 40th year of China-EU relations. Watch the distinct possibility of an emerging Sino-European Fund that finances infrastructure and even green energy projects across an integrated Eurasia. It’s as if the Angel of History – that striking image in a Paul Klee painting eulogized by philosopher Walter Benjamin – is now trying to tell us that a 21st century China-EU Seidenstrasse synergy is all but inevitable.

And that, crucially, would have to include Russia, which is a vital part of the New Silk Road through an upcoming, Russia-China financed $280 billion high-speed rail upgrade of the Trans-Siberian railway. This is where the New Silk Road project and President Putin’s initial idea of a huge trade emporium from Lisbon to Vladivostok actually merge. In parallel, the 21st century Maritime Silk Road will deepen the already frantic trade interaction between China and Southeast Asia by sea. Fujian province – which faces Taiwan – will play a key role. Xi, crucially, spent many years of his life in Fujian. And Hong Kong, not by accident, also wants to be part of the action.

All these developments are driven by China being finally ready to become a massive net exporter of capital and the top source of credit for the Global South. In a few months, Beijing will launch the China International Payment System (CIPS), bound to turbo-charge the yuan as a key global currency for all types of trade. There’s the AIIB. And if that was not enough, there’s still the New Development Bank, launched by the BRICs to compete with the World Bank, and run from Shanghai.

.. the Saudi Arabian foreign minister said the GCC would take “necessary measures” to resolve the Yemeni conflict..”

• Gulf Should Be More Worried About Yemen Than Oil (CNBC)

Civil strife and terrorism in Yemen could pose a greater threat to the Gulf countries of the Middle East than tumbling oil prices, a major bank said on Tuesday. “We can’t help but think that the turmoil in Yemen is the emerging and underappreciated risk for investors in GCC (Gulf Cooperation Council) stocks,” said Citi analysts Josh Levin and Rahul Bajaj in a research note. Despite worries about Islamic insurgency and destabilization in the Middle East and North Africa, investors in the oil-exporting GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) have focused on the potential hit from the slump in energy prices, with crude oil down around 50% since a peak in June 2014.

However, Levin and Bajaj said that increasing strife in Yemen—which borders Saudi Arabia to the south and Oman to the west— could be an “underappreciated risk” to the GCC. “One of the key takeaways from our GCC trip in early February came from an executive in Qatar who observed that while most people are focused on the price of oil, the recent instability in Yemen posed a greater and underappreciated risk to the GCC. Recent events appear to bear out this executive’s observation,” they said on Tuesday. Yemen is in the grips of a worsening civil war, with fighting intensifying between ousted Sunni President Abd-Rabbuh Mansuh Hadi and the Shiite, anti-American rebels who seized power in a coup in January.

The rebels also face violent resistance from Sunni tribesman and competing Islamist extremists in the south. Last week, suicide bombers opposed to the rebels killed 137 people and injured more than 300 others during Friday prayers in the Yemini capital of Sana’a. On Monday, the Saudi Arabian foreign minister said the GCC would take “necessary measures” to resolve the Yemeni conflict, according to media reports. This is in response to requests for military assistance from Hadi, who belongs to the same Muslim Sunni sect as Saudi Arabia’s leaders. Levin and Bajaj warned that the turmoil in Yemen had the potential to spill over into nearby countries. “We have no edge or ability to predict whether or not the conflict in Yemen will spill over into neighboring countries or impact other GCC countries,” they said.

Kolomoysky ‘resigned’ after the article was written.

• Oil Stand-Off In Ukraine Shows Oligarchs Won Maidan Revolution (Sputnik)

Whatever the outcome of the stand-off between President Petro Poroshenko and his subordinate Igor Kolomoysky may be, their conflict over Ukrainian oil giant Ukrnafta reveals realities about post-Maidan Ukraine which mainstream media manages to circumvent. Firstly, the country is still ruled by oligarchs, not by the people, even though Igor Kolomoysky is formally governor of Dnepropetrovsk region. Kolomoysky’s private army simply took control first of Ukrtransnafta (Ukraine’s oil transportation monopoly) and later of Ukrnafta. What does this tell us about the Ukrainian state? Secondly, Ukraine’s oligarchs are not at peace with each other; the country is bracing for a major ‘war for assets’ between the country’s richest men (Kolomoysky is worth $2.4 billion on the Forbes list and Poroshenko is worth $1.3 billion).

Thirdly, the Maidan revolution not only left the country without any meaningful legal opposition in the parliament or in the media – as Kost Bondarenko, director of the Kiev-based Foundation for Ukrainian Politics, put it in his article for the Moscow-based Nezavisimaya Gazeta – but the revolution also left Ukraine in a situation of complete lawlessness, when neither laws nor even the words of the president mean much before brutal force and big money (the main weapons of oligarchs). The story of the weekend conflict between Ukraine’s president and the governor of Ukraine’s most important industrial region is a perfect illustration of all these sad truths. Kolomoysky’s men with submachine guns not only took control of Ukrtransgaz on Friday, but the governor of Dnepropetrovsk was apparently untroubled by President Poroshenko’s reprimand for his “unethical behavior” issued the next day.

Kolomoysky’s response to this “scolding” from Poroshenko was widely reported, along with an officially unconfirmed freeze on the accounts of Poroshenko’s companies in Kolomoysky’s bank (Privat-bank). Adding armed insult to the financial injury, Kolomoysky’s men on Sunday took control of Ukrnafta, the country’s biggest oil company, presenting themselves as members of the “voluntary battalion Dnieper” (a Kolomoysky-sponsored paramilitary group known for its atrocities against civilians in the rebellious Donetsk Region). Despite Poroshenko’s order to disarm the gunmen and the president’s promise that “there will be no pocket armies in Ukraine,” Kolomoysky’s men did not leave the building on Monday; instead, they started to put up metal fences around it.

“..fiscal tightening has cost developed economies 5-10 percentage points of GDP growth since 2010..”

• Fiscal Virtue And Fiscal Vice – Macroeconomics At A Crossroads (Skidelsky)

Until a few years ago, economists of all persuasions confidently proclaimed that the Great Depression would never recur. In a way, they were right. After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero. But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition. Economic advisers assured their bosses that recovery would be rapid. And there was some revival; but then it stalled in 2010. Meanwhile, governments were running large deficits – a legacy of the economic downturn – which renewed growth was supposed to shrink.

In the eurozone, countries such as Greece faced sovereign-debt crises as bank bailouts turned private debt into public debt. Attention switched to the problem of fiscal deficits and the relationship between deficits and economic growth. Should governments deliberately expand their deficits to offset the fall in household and investment demand? Or should they try to cut public spending in order to free up money for private spending? Depending on which macroeconomic theory one held, both could be presented as pro-growth policies. The first might cause the economy to expand, because the government was increasing public spending; the second, because they were cutting it. Keynesian theory suggests the first; governments unanimously put their faith in the second.

The consequences of this choice are clear. It is now pretty much agreed that fiscal tightening has cost developed economies 5-10 percentage points of GDP growth since 2010. All of that output and income has been permanently lost. Moreover, because fiscal austerity stifled economic growth, it made the task of reducing budget deficits and national debt as a share of GDP much more difficult. Cutting public spending, it turned out, was not the same as cutting the deficit, because it cut the economy at the same time. That should have ended the argument. But it did not. Some economists claim that governments faced a balance of risk in 2010: cutting the deficit might have slowed growth; but not committing to cut it might have made things even worse.

Reinforce your local infrastructure!

• Pension Funds Seek Shelter From Dollar’s Rise (WSJ)

The soaring U.S. dollar is driving pension funds into the currency markets, in part to protect their overseas investments but also to take advantage of some of the biggest price swings in the financial world. In January, the California State Teachers Retirement System, the nation’s second-largest public pension fund with $190.8 billion under management, handed $500 million to a pair of specialist currency funds as part of an effort to limit losses on their international investments, which fall in value as the dollar rises against other currencies. Late last year, the $150.2 billion Florida State Board of Administration expanded its currency investments by more than 10%, to $2.25 billion.

Last June, the $29 billion Connecticut Retirement Plans & Trust Funds hired two managers to help reduce the foreign-currency risks in its international stock investments. And the $14.3 billion Kansas Public Employees Retirement System is now looking to hire a currency manager. The clamor to protect against currency swings marks a return to a strategy that pension funds have tried on and off for years, with mixed results. While it is good news for the money managers that provide the strategies, which stand to reap tens of thousands of dollars in fees for every pension plan that signs up, it also adds to the risks taken on by pensions. Currency markets are among the most volatile, raising the potential for big profits, but also big losses.

“The pickup since December has been extraordinary,” said Adrian Lee, who manages Adrian Lee & Partners hedge fund. “We’ve had more funds interested in our strategies in the last three months than we’ve had in the last three years.” The fund’s assets have grown 30% in the past year, as existing clients raised their allocations, Mr. Lee said. At their most basic, currency strategies come in two flavors. A passive currency-overlay program that seeks to hedge against foreign-exchange losses typically costs between 0.05% and 0.1% of assets, based on a pension’s exposure to foreign markets, according to NEPC, a consultant to pension plans.

Active strategies that seek to profit from currency swings tend to be several times more expensive, as they include higher management fees and allow hedge funds to keep a share of profits. The rising dollar has re-energized interest in both strategies. While the U.S. Federal Reserve is expected to raise interest rates as soon as June, both Europe and Japan are pumping out economic stimulus at unprecedented levels, seeking to stimulate their economies by keeping rates low. The divergence in borrowing costs has sparked an exodus of capital, as investors quit euro and yen-denominated assets and head into the greenback.

From one scandal to the next.

• Brazil Investigates Deficit-Ridden Pension Fund (Bloomberg)

The deficit-ridden pension fund for Brazilian postal workers is being investigated for alleged reckless management after several years of money-losing bets ranging from investments in Lehman Brothers bonds to Argentine debt, two people with knowledge of the matter said. Pension-fund agency Previc, securities regulator CVM, the central bank and federal prosecutors are collaborating on the probe and meeting weekly to conclude a report on Postalis, Brazil’s third-largest retirement system by number of beneficiaries, said one of the people, who asked not to be named because the issue is private. The findings may be released in coming days, the person said. Under Brazilian law, the agencies may seek penalties that may include fines of as much as 1 million reais ($320,200) and a 10-year ban from managing pension funds.

Postalis has been running a deficit every year since 2011 and the shortfall of 5.6 billion reais now eclipses its 5 billion reais in assets, public records show. Now, the pension fund created in 1981 to take care of Brazil’s more than 100,000 postal workers is requiring those same employees to boost contributions so it can keep making payments to beneficiaries. “They threw us under the bus,” said 36-year-old Douglas Melo, who is required to pitch in an extra 40 reais a month on top of the 55 reais he already contributes to guarantee future benefits of 200 reais a month. “The fund’s investments that later defaulted or were involved in scandals make no sense.”

Postalis amassed billions of reais in losses pursuing risky bets while its peers flocked to the relative safety and high yields of Brazilian government debt. Brazil’s pension funds allocated 15% of their combined 641.7 billion-real portfolio to Brazil local sovereign debt in 2012, according to the nation’s association that tracks the industry. Postalis held less than 1% in 2012. Postalis bet on a fund that booked 18 million reais of Lehman Brothers debt in August 2008, one month before the New York investment bank filed for bankruptcy, according to data from Brazil’s securities regulator. It bought bonds or invested in funds of mid-sized Brazilian banks that were liquidated by the central bank in 2012 amid fraud allegations and lack of capital.

Rage against the monopoly. And then create another one just as fast.

• Money May Make The World Go Round, But At What Cost? (BBC)

Banks once had a near monopoly on moving money around the world, and they charged a pretty penny for it. But since the 2008 financial crisis, their reputations have taken an almighty battering, and a growing number of technology-focused start-ups are intent on getting a slice of the action. Cost has become the battleground and technology the weapon in this huge business: people send more than $500bn (£334bn) abroad each year. TransferWise, for example, says banks and independent money transfer giants such as Western Union and MoneyGram, charge about 5-8% in fees when transferring money abroad, and these fees are often concealed within the exchange rate. It charges just 0.5% of the amount being converted. This can equate to a £100-£150 saving on a £5,000 international money transfer.

Founded by Estonians Taavet Hinrikus and Kristo Kaarman, the firm achieves this by matching people transferring money in one direction with people transferring it in the other – so called peer-to-peer transfers. In other words, you are in effect buying your currency from other individuals, thereby cutting out a big chunk of exchange rate and “foreign transaction” charges normally levied by banks. “We didn’t understand why transferring money had to be so expensive,” says Mr Hinrikus, who was one of the first employees of Skype, the online communications company. “With us, it’s all about transparency – that’s really important. We choose the mid-market rate when we transfer money.” Another key to their success – TransferWise has shifted more than £3bn of customers’ money since 2011 – is the simplicity of design, he says.

Does he do this of his own accord?

• Obama Snubs NATO Chief as Crisis Rages (Bloomberg)

President Barack Obama has yet to meet with the new head of NATO, and won’t see Secretary General Jens Stoltenberg this week, even though he is in Washington for three days. Stoltenberg’s office requested a meeting with Obama well in advance of the visit, but never heard anything from the White House, two sources close to the NATO chief told me. The leaders of almost all the other 28 NATO member countries have made time for Stoltenberg since he took over the world’s largest military alliance in October. Stoltenberg, twice the prime minister of Norway, met Monday with Canadian Prime Minister Stephen Harper in Ottawa to discuss the threat of the Islamic State and the crisis in Ukraine, two issues near the top of Obama’s agenda. Kurt Volker, who served as the U.S. permanent representative to NATO under both President George W. Bush and Obama, said the president broke a long tradition.

“The Bush administration held a firm line that if the NATO secretary general came to town, he would be seen by the president … so as not to diminish his stature or authority,” he told me. America’s commitment to defend its NATO allies is its biggest treaty obligation, said Volker, adding that European security is at its most perilous moment since the Cold War. Russia has moved troops and weapons into eastern Ukraine, annexed Crimea, placed nuclear-capable missiles in striking distance of NATO allies, flown strategic-bomber mock runs in the North Atlantic, practiced attack approaches on the UK and Sweden, and this week threatened to aim nuclear missiles at Denmark’s warships. “It is hard for me to believe that the president of the United States has not found the time to meet with the current secretary general of NATO given the magnitude of what this implies, and the responsibilities of his office,” Volker said.

Barney Frank memoirs.

• Paulson and Warren: The Unlikely Twin Towers of Dodd-Frank (Bloomberg)

On the surface, Henry Paulson, the former CEO of Goldman Sachs and Secretary of the Treasury under President George W. Bush, and Senator Elizabeth Warren, the populist Democrat from Massachusetts, seem an unlikely team. But former Representative Barney Frank, co-author of the Dodd-Frank financial reform legislation enacted in 2010, said he views Paulson and Warren as twin pillars protecting the financial system. In an interview this week on the Charlie Rose television program, Frank, who was chairman of the House Financial Services Committee during the 2008-2009 financial crisis, recalled former Federal Reserve Chairman Ben Bernanke and Paulson telling Congressional Democratic leaders, “The economy is about to fall apart and we have got to do something the public isn’t going to like.”

Frank worked with Bernanke and Paulson to push through the unpopular but ultimately successful financial bailout known as the Troubled Asset Relief Program. Paulson, Frank said, remained helpful even after leaving government, assisting in the drafting and passing of Dodd-Frank. While Paulson helped establish Dodd-Frank, Frank said, “Elizabeth Warren is helping safeguard it” from Republicans eager to scuttle the law. He acknowledged that Dodd-Frank is complex. But Frank insisted it was neither politically nor substantively possible to make the legislation, which overhauls some regulations dating to the 1930s, less complicated. “In the thirties, there was no such thing as credit default swaps and collateralized loan obligations and collateralized debt obligations,” he said.

Frank’s memoir – titled “Frank” – chronicles his more than four decades in public life. For the first two decades, he said, he felt it necessary to hide his sexuality while celebrating his advocacy of liberal policies. Now, he says, it’s easier to be gay — he was married during his final term in Congress – and harder to champion liberal policies.

The World Bank as a power tool.

• Presidents, Bankers, the Neo-Cold War and the World Bank (Nomi Prins)

At first glance, the neo-Cold War between the US and its post WWII European Allies vs. Russia over the Ukraine, and the stonewalling of Greece by the Troika might appear to have little in common. Yet both are manifestations of a political-military-financial power play that began during the first Cold War. Behind the bravado of today’s sanctions and austerity measures lies the decision-making alliance that private bankers enjoy in conjunction with government and multinational entries like NATO and the World Bank. It is President Obama’s foreign policy to back the Ukraine against Russia; in 1958, it was the Eisenhower Doctrine that protected Lebanon from a Soviet threat. For President Truman, the Marshall Plan arose partly to guard Greece (and other US allies) from Communism, but it also had lasting economic implications.

The alignment of political leaders and key bankers was more personal back then, but the implications were similar to the present day. US military might protected its major trading partners, which in turn, did business with US banks. One power reinforced the other. Today, the ECB’s QE program funds swanky Frankfurt headquarters and prioritizes Germany’s super-bank, Deutschebank and its bond investors above Greece’s future. These actions, then and now, have roots in the American ideology of melding military, political and financial power that flourished in the haze of World War II. It’s not fair to pin this triple-power stance on one man, or even one bank; yet one man and one bank signified that power in all of its dimensions, including the use of political enemy creation to achieve financial goals.

That man was John McCloy, ‘Chairman of the Establishment’ as his biographer, Kai Bird, characterized him. The relationship between McCloy and Truman cemented a set of public-private practices that strengthened private US banks globally at the expense of weaker, potentially Soviet (now Russian) leaning countries. [..] During the Cold War, the World Bank provided funds for countries that leaned toward capitalism versus communism. Political allies of the United States got better treatment (and still do). The Nations that private bankers coveted for speculative and lending purposes saw their debt loads increase substantially and their industries privatized. Equally, the bankers decided which bonds they could sell to augment public aid funds, which meant they would have control over which countries the World Bank would support. The World Bank did more to expand US banking globally than any treaty or entity that came before it.

Good read.

• Financial Feudalism (Dmitry Orlov)

Once upon a time—and a fairly long time it was—most of the thickly settled parts of the world had something called feudalism. It was a way of organizing society hierarchically. Typically, at the very top there was a sovereign (king, prince, emperor, pharaoh, along with some high priests). Below the sovereign were several ranks of noblemen, with hereditary titles. Below the noblemen were commoners, who likewise inherited their stations in life, be it by being bound to a piece of land upon which they toiled, or by being granted the right to engage in a certain type of production or trade, in case of craftsmen and merchants. Everybody was locked into position through permanent relationships of allegiance, tribute and customary duties: tribute and customary duties flowed up through the ranks, while favors, privileges and protection flowed down.

It was a remarkably resilient, self-perpetuating system, based largely on the use of land and other renewable resources, all ultimately powered by sunlight. Wealth was primarily derived from land and the various uses of land. Feudalism was essentially a steady-state system. Population pressures were relieved primarily through emigration, war, pestilence and, failing all of the above, periodic famine. Wars of conquest sometimes opened up temporary new venues for economic growth, but since land and sunlight are finite, this amounted to a zero-sum game. But all of that changed when feudalism was replaced with capitalism. What made the change possible was the exploitation of nonrenewable resources, the most important of which was energy from burning fossilized hydrocarbons: first peat and coal, then oil and natural gas.

Suddenly, productive capacity was decoupled from the availability of land and sunlight, and could be ramped up almost, but not quite, ad infinitum, simply by burning more hydrocarbons. Energy use, industry and population all started going up exponentially. A new system of economic relations was brought into being, based on money that could be generated at will, in the form of debt, which could be repaid with interest using the products of ever-increasing future production. Compared with the previous, steady-state system, the change amounted to a new assumption: that the future will always be bigger and richer—rich enough to afford to pay back both principal and interest.

A tragic species killing itself:”..antibiotic use in livestock will likely rise 67% by 2030 if livestock conditions don’t improve. About 80% of antibiotics sold in the United States go to livestock”.

• Antibiotics In Meat Rising Fast Worldwide, Especially Bacon (UPI)

In the next 15 years, countries around the world will see a major increase in antibiotic use in livestock, a new study finds. “The invention of antibiotics was a major public health revolution of the 20th century,” said senior author Ramanan Laxminarayan, a senior research scholar at the Princeton Environmental Institute and director of the Center for Disease Dynamics, Economics and Policy. “Their effectiveness – and the lives of millions of people around the world – are now in danger due to the increasing global problem of antibiotic resistance, which is being driven by antibiotic consumption.” The study was done by researchers at the Center for Disease Dynamics, Economics and Policy, Princeton University, the International Livestock Research Institute and the Université Libre de Bruxelles.

The researchers found antibiotic use in livestock will likely rise 67% by 2030 if livestock conditions don’t improve. About 80% of antibiotics sold in the United States go to livestock. Antibiotic resistance not only applies to the animals, but it can affect the humans eating the meat. The researchers found pig farmers producing pork and bacon use four times as many antibiotics as cattle farmers. One of the major reasons farmers are having to use more and more antibiotics is that demand for meat is going up, and animals are often subjected to smaller and smaller living quarters, where disease can spread.

Feel the power.

• Monsanto Bites Back at Roundup Findings (WSJ)

Monsanto Co. escalated its criticism of a World Health Organization agency’s finding last week that a commonly used herbicide probably has the potential to cause cancer in humans. The St. Louis-based agribusiness giant—a major seller of the weed killer—sought a meeting with senior WHO officials on the International Agency for Research on Cancer’s finding, while a WHO agency official defended what he called an “exhaustive” review of eligible data. The IARC’s classification of glyphosate, the U.S.’s most commonly used weedkiller, as “probably carcinogenic” in a report published Friday reignited debate over a chemical that environmental groups have long criticized and the agricultural industry has defended as safe for humans and less harsh on the environment than others.

“We are outraged with this assessment,” Robert Fraley, Monsanto’s chief technology officer, said Monday, arguing that the finding was derived from “cherry picking” data based on an “agenda-driven bias.” Monsanto, which markets glyphosate under the Roundup brand, sent letters to WHO members seeking to discuss the IARC classification, which Monsanto officials said ran counter to many other findings, including those by other WHO programs, according to Philip Miller, the company’s vice president of global regulatory affairs. Dana Loomis, deputy head of the monographs section for the IARC, said the agency’s classification of glyphosate as “probably carcinogenic” was based on an examination of peer-reviewed research and completed government reports on the herbicide.

“We feel confident that our process is transparent and rigorous, based on the best available scientific data, and that it’s free from conflicts of interest,” Mr. Loomis said. He also said it was “categorically not true” that the IARC overlooked research on glyphosate, as Monsanto and other agriculture groups alleged. He said the IARC seeks to find and review all publicly available, peer-reviewed research and government documents in their final form. That excludes draft research, he said, which can change before it is completed.

Making Money While The World Burns

Nov 192014

November 19, 2014 Posted by Raúl Ilargi Meijer at 11:07 pm Finance Tagged with: collapse, fund, homeless, Hugh Hendry, investors, jobless 18 Responses »

DPC Launch of battleship Georgia, Bath, Maine, Oct 1904

I was reading this letter to his fund investors by Hugh Hendry, a very intelligent and probably slightly autistic fund manager I’ve liked a lot forever and a day and have written about quite a bit in the past, and it got me thinking about how and why I see the world different from the way he does, and wondering how you see that difference.

Hugh was for years known as a true bear, and then he turned around, changed his views and turned bull, only at the same time he did not. If that makes any sense. I’ll take you through the letter as posted by Tyler Durdenand try to explain what struck me in it. It’s much easier and safer not to write things like this, but I think there are things you must explore, like how do you react when realize your world is falling to bits.

Hendry, I think, is as bearish (or negative) about the – future of – world as he has been for a long time, only he’s decided to see things from his fund manager point of view, and to ride the crest of the waves the central banks have tsunamied towards our shores. He’s chosen to make a buck off of them waves, even as he’s aware of the damage they’ll will do once they hit land. In the exact same way as a surfer who sees a tsunami as merely a set of great waves to ride on. And, no value judgment involved, but that’s not what I see.

He sees the world going to hell in a handbasket (and Hendry recognizes that very much, that’s not why he shifted gears from bear to bull) and his response is to grab as much money and wealth as he can (for his investors … ). My response is different: I don’t see filling my personal coffers as a priority when I see the numbers of homeless children in the States shoot up, or the over 50% of youth without a job or a future in southern Europe for many years running, or all the other stuff that goes awfully wrong all around here behind the ‘recovery’ veil, stuff that Hendry is acutely aware of.

I simply think other people’s misery, especially when it comes in droves, is a bigger threat to my existence, my lifestyle, my society, my community, and certainly my peace of mind than having a few bucks more or less. We’re not in some market cycle move here, we’re in something much bigger. And Hugh Hendry knows that too. I don’t believe in ‘we have a world to save’, I think that’s beyond our means, but I do see a responsibility towards smaller units, a town, a society, perhaps even a country, simply for our own sakes and that of our children.

And I think viewing today’s world primarily through a fund manager’s eyes, especially if you have the brains to see more and wider and bigger, is poor and bleak. And if you’re Hugh Hendry, you don’t need the money to keep yourself from starving. It becomes more like Bill Gross who at an age when most men have long retired, moves from Pimco to some other fund to make even more money. It turns into the kind of poverty that money can not hide. Here’s Hendry:

My premise hasn’t really changed since I published my paper explaining why I had become more constructive towards risk assets this time last year. That is to say, the structural deficiency of global demand continues to radicalise the central banking community. I believe they are terrified: the system is so leveraged and vulnerable to potentially systemic price reversals that the monetary authorities find themselves beholden to long only investors and obliged to support asset prices.

However, I clearly confused everyone with my choice of language. What I should have said is that investors are perhaps misconstruing rising equity prices as a traditional bull market spurred on by revenue and earnings growth, and becoming fearful of a reversal, when instead the persistent upwards drift in stock markets is more a reflection of the steady erosion of the soundness of the global monetary system and therefore the rise in stock prices is something that is likely to prevail for some time. There is more to it of course, as I will attempt to explain, but not much.

[..] the world’s monetary authorities are targeting higher risk asset prices as a policy response to restoke economic demand. Whether you agree with such a policy is irrelevant. You need to own stocks. And yet, remarkably, the most contentious thing you can say in the macro world today is “I’m bullish”.

In a world dominated by the existentialist angst of identifying and trading qualitative value, there is profound mistrust of equity values today; macro investors see prices as overvalued and few are willing to capitalise on the opportunities to make money.

This angst and fear of big drawdowns in risky assets in part reflects astonishment that policy makers were able to rescue investors from the folly of their misallocations in the years preceding 2008 and that stocks have massively outperformed the modest rise in global nominal GDP. I should know. I, like others, became a moraliser who just couldn’t forgive the Fed for bailing out Wall Street.[..] I became a moral curmudgeon rather than a money maker.

As you know, I have sought to overcome this deficiency. However my risk controls, or rather my procedures for dealing with big monthly losses, seemed to anchor me to the bearish camp (against my better wishes). [..] since the end of last year I have been a bull that had to sell for lower prices. No wonder I couldn’t make you money. But perhaps you don’t need such reactive stop loss policies when the world’s central banking community is intent on protecting you; [..]

Japan was down 16% from its highs earlier this year. I was particularly long Japanese equities at the start of the year and so at some point, fearing greater losses, I swallowed my pride and booked a loss. However, the ongoing policy intentions of the BoJ meant that the stock market clawed back all of its losses. Why did I sell?

European stocks fell almost the same over the summer but again the ECB upped its ante, pushed short term rates negative, tolerated a weaker currency and promised to re-stock its balance sheet with more local risk asset purchases. Lo and behold, European stock prices recovered sharply in August and early September. So why did I reduce my holdings?

October is simply another example. US stocks fell over 10%. I don’t really know why. Was it the threat of the end of QE or a global pandemic or more misgivings as to the state of affairs in Greece and Europe’s enduringly weak economy? It doesn’t really matter. […]

So why all this enthusiasm for upside equity risk? [..] The FX market tends to take the US Supreme Court view. Overruling an obscenity charge for showing a salacious French movie in Ohio in 1964, Justice Potter Stewart wrote that the Constitution protected all obscenity except hard core pornography. Unwilling to define the latter, the judge maintained that he would know it when he saw it. [..]

Which is a rather long preamble to describe what I believe is a very analogous central banking intervention in today’s financial markets. It would take just too long for the Fed, ECB or the BoJ to rely on a return of animal spirits in the real economy to lift their flagging economies. They need the remedy of fast moving risk asset prices. By using QE to promote more risk taking, asset values in the US have risen faster than fundamentals and, with better perceived collateral and more confidence, the demand for risk taking in the real economy has recovered somewhat. At a lag, the theory runs, so will the rate of expected inflation.

So I think we find ourselves especially in Europe (and Japan) with a situation whereby the central bank has to use all of its powers to engineer higher stock and bond prices. And I think the precarious nature of France and the election timetable in 2017 means that they need higher European stock and bond prices NOW or there will be no economic recovery, budget deficits will continue to overshoot 3% and the Euro area will get trapped in the poisonous and perpetual cycle of having to demand more and more unpopular austerity measures. This is high stakes: boost European stock prices or risk losing France and the euro. To my mind the message is simple: don’t short French bonds, buy European stocks and short the euro.

Hugh Hendry sees the world in an extremely bearish way, he sees hell, the handbasket, brimstone and far worse. But he wants to profit – in name of his investors (?!) – from the very mechanism that drives the world there: the power central banks and governments have been allotted, and the way they use it to protect the interests of investors, banks, insurance companies and uber rich individuals, all at the expense of booting the 90% who make up the real world and the real economy, ever deeper into the mud.

Seeking to profit from that is a choice. Hendry makes it, and so do many others, even many inside the 90%. Who mistakenly dream they’ll be able to hold on to those profits (they’ll wake up yet, and wish they had before). The whole idea of scraping out what you can before the tsunami hits is not my thing.

Hugh Hendry recognizes, as many other people do, that there would be no viable markets left if central banks wouldn’t have kept them standing up for years now and made us all pay. But he, and many like him, still think that the best thing to do in that situation is to grab what you can before it’s over. I think that is worth asking a question or two about.

Of course it all depends on how bad you think it will get. Well, Hendry has an idea, just look him up on YouTube, and I have an idea, and so do lots of others. None of us can be sure what the use of a few bucks more or less will be when things get as bad as we think they will get. But there’s no certainty anywhere in sight. And for me, that means what’s more important, and what is certain, are things like this Simon Black graph, that makes me wonder what on earth we’re doing around here:

You see what’s happening to these kids and your answer is let’s make as much money as we can? That’s how we think? I’m sure a lot of people, rich or poor, have pondered how to get more self-sufficient, and a few have taken great strides towards that too. But I’m also sure the successful ones in that regard would all agree that money in the end had very little to do with it.

So do or don’t we have anything better to do with ourselves than make money while the world burns? And do we think the money we might make will have much value once the fire spreads? If the ‘world of money’ is in as bad a shape as Hugh Hendry says it is, and can only be maintained by ever more desperate machinations by central banks, until it evidently can’t? There doesn’t seem to be a clear answer, to put it mildly.

Is making and hoarding as much money as you can the best answer to a collapsing financial system which may or may not leave much value in that money? Same for gold, silver et al, though many people see just that as the big answer.

In the end, the issue may be whether amassing material wealth is the right answer to the demise of a system based on material wealth. A suggestion is that perhaps growing your own food and learning how to make the things you need, yourself, is a better answer. Just because you have money, or gold, doesn’t mean you can buy things with it. Don’t mistake money and self-sufficiency.

And that’s what Hugh Hendry’s shift from bear to bull, but not really because he knows where it’s going, made me think of. Now it’s your turn.

Are You Expecting A Recession?

Nov 102014

November 10, 2014 Posted by Raúl Ilargi Meijer at 8:57 pm Finance Tagged with: China, cyclical, EU, Fed, investors, Japan, Kondratieff, recession 8 Responses »

Russell Lee Columbia Gardens outdoor amusement resort, Butte, Montana Aug 1942

The folks at Bloomberg put this piece up today with the intriguing title‘Predictors of ’29 Crash See 65% Chance of 2015 Recession’, and I thought: wait a minute, that’s what people, lots of people, actually think, that there’s going to be recession. While still others will trust Morgan Stanley and Goldman Sachs, who, as the article put it, “posit an expansion that has plenty of room to run.”

For the vast majority of those in the world of finance, and probably in a much wider world, those are the options, because that’s how they think. Either more of the same, or a recession, as we know it in a cyclical sense, where the economic cycle goes up and down but in the end keeps turning up. And where any sudden moves are telegraphed well in advance by monetary authorities for the grace and benefit of them, the investors, so they don’t lose too much and can instead profit at every step, whether it’s up or down.

And then it dawned on me, which took a few seconds because that’s not how I see the financial system at all, I see neither a recession nor a helpful and friendly Fed, that this is why so much money is going to be lost by so many people. But then, from where I’m sitting, that’s the game, isn’t it? In a functioning market, someone needs to lose for someone else to gain. And the smartest prevail.

And y’all you want a real market, don’t you? One that reflects what’s really going on in the real economy?! Just so, you know, you’re not going to buy shares in companies that report numbers painted with big fat strokes of bright pink or shiny red lipstick on your porkchop.

The problem with this is that whatever money you manage to save in a collapse is money the major banks won’t be making. They’d much rather take it from you than let you keep it. And who do you think the Fed will turn out to be more friendly with, you or Jamie Dimon and the Oz behind his curtain?

if you take a good hard look at how the US – and EU and Japan – economies have developed over the past decade, there’s only one possible conclusion you can draw. Which is that these countries no longer have functioning markets. Without the multiple trillions in stimulus share prices would have been at a fraction of where they are now.

And then the question is how much longer that pretty much blind market support can continue. Well, it won’t be infinite. Because that would bankrupt nations too fast even for Wall Street’s international banks, but more importantly because those same banks are not making nearly enough money in the present set-up. And that’s the clincher.

But apart from what the Fed wants or doesn’t want, the fact remains that it has been instrumental in blowing the bubbles of the Dow and S&P to unforeseen heights. And that this has happened because through time investors started believing the Fed has their back. Countless ‘experts’ today will tell you that if markets start falling tomorrow, the Fed will step back in.

Really? To what end? If that were true, they might as well never have tapered. Because if anyone knows how the Fed has distorted the markets, it’s the Fed itself. So for all I know, they may simply think they’re done distorting. And that they can sit back and watch the, after all inevitable, collapse unwind.

Inevitable because the alleged progress and recovery we’ve seen since US QE started brings tears to your eyes when you look past the partly massaged and partly plainly made-up numbers that go into GDP and jobs reports. Wipe off all the lipstick from the American pig, and you’re left with no more than a handful meager slices of diet bacon.

The Fed knows this, I know this, and now you do too, but many investors don’t seem to be catching on. They are, instead, talking about the probability of a recession. But that’s not what lies ahead. We’re well, and fast, on our way to a deep depression. Nothing cyclical, unless perhaps you’re talking Kondratieff’s 70-year cycles.

Recession is a useless discussion by now. The US is a painted pig, the EU needs to let countries go or they’ll go to war, Japan hung its head in a noose for Halloween and China has its 32nd consecutive month of falling factory-gate prices.

Lower oil prices may for now hide some of the pain, but even that is too much for Japan, because of the deflationary effect of even less consumer spending. And it’s that lack of spending that’s everyone’s worst enemy. But you can’t solve that with central bank stimulus. The formerly rich world is loaded with burger flippers, food stamps and underwater homes, and that means less, not more, spending.

And we all know, though perhaps not by how much, that all ‘formerly rich’ governments have historically unequaled spin doctors on their payroll, so the real numbers across the board are much much worse even then what we are ‘allowed’ to know. And what we do know is already awful once you sweep away the propaganda. You’re only going to be OK as an investor if the Fed continues to hold your hand and lead you softly through the ups and downs. You really think they will?

Recession? In your dreams.

US Shale And The Slippery Slopes Of The Law

Oct 102014

October 10, 2014 Posted by Raúl Ilargi Meijer at 6:29 pm Finance Tagged with: debt, investors, law, legal, reserves, Shale 10 Responses »

DPC School Street and Parker House, Boston MA 1906

It’s been only two months since I last -again – addressed the shale industry, but apparently it’s still not clear enough what a predatory scheme it is. Today, Bloomberg adds even more fuel to the fire. If you want to know how the combination of slip-sliding legal standards and ultra-low interest rates has perverted the US – and global – economy, you need look no further than shale.

The central point the Bloomberg article evokes is simple: does the difference between proved reserves, probable reserves and possible reserves (or resource potential), as reported by oil and gas extraction companies, constitute a lie? And the answer is just as simple: no, it doesn’t. But that’s not where the issue ends, it’s where it begins.

That is, if the difference between the two gets too wide, – potential – investors in company stocks and bonds are not getting the information they are entitled to. The industry may claim, as in the article, that investors are aware of the discrepancy inherent in the numbers, but that’s at best true for most investors, and the bigger ones. Still, the companies shouldn’t be able to use that as some unlimited excuse to claim whatever they wish. Because they can basically throw out any number they want in front of investors, no matter what it’s based on, and it’s legal.

And while there may be a kernel of truth in this bit …

“They’re running a great risk of litigation when they don’t end up producing anything like that,” said John Lee, a University of Houston petroleum engineering professor who helped write the SEC rules and has taught reserves evaluation to a generation of engineers. “If I were an ambulance-chasing lawyer, I’d get into this.”

… there’s also something missing. By the time investors can start any litigation, chances are the companies involved may be long gone. The greater public, and some of the investors, may be fooled, but the industry people themselves? They know about the depletion rates typical of shale wells, of the fact that few wells ever make their owners any real profit, and of the $500 billion(!) the industry lost over the past 5 years.

The shale industry runs on debt, not on energy. And as long as these companies can issue junk bonds at low rates, they will. But that doesn’t mean they will ever be profitable. For their owners, sure, they’re raking in dough like it’s Halloween candy, but for investors in those bonds things don’t look so rosy. Shale is a Ponzi.

And US law allows it to grow. One set of reserves gets presented to the regulator (SEC), and an entirely different one to the investor. One company, Rice Energy, tells investors it has 27 times as many reserves as it tells the SEC.

We’re Sitting on 10 Billion Barrels of Oil! OK, Two

To count as proved reserves to the SEC, companies must have “reasonable certainty” that the oil and gas will be extracted from existing wells and those scheduled to be drilled within five years. [..] The forecasts are based on fuel prices, geology, engineering and the performance of nearby wells. Planned wells must be economically and technically viable.

Whereas forecasts for investor presentations are based on a combination of hopium, wishful thinking, media savvy, creative accounting and pure fantasy. This is ‘justified’ by saying: ‘everybody knows we lie, so who cares if we lie’. Except that it’s not legally a lie.

No such rules apply to appraisals that drillers pitch to the public, sometimes called resource potential. In public presentations, unregulated estimates included wells that would lose money, prospects that have never been drilled, acreage that won’t be tapped for decades and projects whose likelihood of success is less than 10%.

Figures the company executives cite during presentations “are used in the capital allocation process, and are a standard tool the investment community understands and relies on in assessing a company’s performance and value …” [..] The presentations rarely explain how the drillers calculated the figures. The numbers sometimes change from one presentation to the next.

On account of thorough research by the companies, no doubt.

… companies use their own variation of resource potential, often with little explanation of what the number includes, how long it will take to drill or how much it will cost. The average estimate of resource potential was 6.6 times higher than the proved reserves reported to the SEC …

And 6.6 times is really lowballing it when it comes to some of these firms:

Lee Tillman, chief executive officer of Marathon Oil, told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage. That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators. Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports.

62 of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer’s estimate was 13 times higher. Goodrich’s was 19 times. For Rice Energy, it was almost 27-fold.

Denver-based Cimarex Energy is one company that doesn’t report a different number to investors than it does to the SEC. “We want to have things on the books that are part of our near-term drilling plans,” Karen Acierno, a Cimarex spokeswoman, said in an interview. “A lot of people appreciate our conservative nature, a lot of investors.” Cimarex shares are up 19% in the past year.

The investor presentation by Rice Energy shows 2.7 billion barrels. Rice, which went public in January, reported 100 million barrels to the SEC in March, records show. At Pioneer Natural Resources, the number they cite to potential investors has increased by 2 billion barrels a year in each of the last five years – even as the proved reserves it files with the SEC have declined. The rising number is “a game changer for this company,” said Sheffield, the CEO. “It’s a game changer for this country.”

No kidding, there, Mr. CEO.

Investors poured $16.3 billion in the first seven months of the year into mutual funds and exchange-traded funds focused on energy companies, including drillers that create fractures in rocks by injecting fluid into cracks to enable more oil and gas to flow out of the formation. That’s almost twice as much as in the same period last year, bringing total assets to $128.2 billion, according to New York-based Strategic Insight. [..]

Lee, the University of Houston professor, said in an interview that he’s alarmed by the inconsistent and overly optimistic estimates published by shale companies. “If a lot of people get burned – and I think a lot of people can and will be burned – by these numbers in the investor presentations, there may be a push by investors to get the SEC to do something about it … ”

Horse, meet barn. The SEC won’t do anything, and it cannot change the law anyway, until these companies are dead broke and their owners longer liable for anything at all.

The US shale industry presents itself to investors as something it is not: it hugely overestimates its reserves, it carries incredible amounts of debt, there is cash flow but it doesn’t even begin to cover expenses, and its wells, which cost $8-20 million a piece to drill, even on average deplete faster than you can say ‘Christmas next year’.

Meanwhile, politics and media sing the Hossanah of energy independence, which in turn makes oil and gas prices slump to such a degree that shale becomes even less viable than it -obviously to us – already is. But as long as you’re legally allowed to overstate your reserves 27-fold, you can squeeze this balloon for another year or so, right.

It all makes me think that if people don’t see through this nonsense, they get what they deserve and perhaps need in life. But as always, it’s the little people who will end up paying up. And I don’t like that one bit. And if this is what America has become, a giant Ponzi, someone should raise their voice before it gets completely out of hand. If this kind of spiel is legal, there’s something deeply wrong with the law.

I could say much more about this, and I have, but it’s probably better if for more, you refer to for instance these past Automatic Earth articles on shale:

Get ready for the North American gas shock

Fracking Our Future

Shale Gas Reality Begins to Dawn

Shale Is A Pipedream Sold To Greater Fools

The Darker Shades Of Shale

Debt and Energy, Shale and the Arctic

Debt Rattle Sep 22 2014: The Fed Kills Emerging Markets For Profit

Sep 222014

September 22, 2014 Posted by Raúl Ilargi Meijer at 9:52 pm Finance Tagged with: emerging markets, Fed, interest rates, investors 2 Responses »

DPC Herald Square, New York 1903

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

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

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

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

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

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

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

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

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

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

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

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

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

Investors Bet on Asia Despite U.S. Rate Threat

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

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

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

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

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

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

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

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

One more then, because you enjoy it so much:

Fed Dims Emerging Markets’ Allure

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

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

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

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

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

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

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

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

Will, not could.

• Stronger Dollar Could Put Squeeze On Earnings (MarketWatch)

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

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

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

Yes but.

• The Fallacy Of US Dollar “Strength” (Macleod)

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

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

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

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

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

Flaky.

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

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

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

Everything’s down vs the dollar is all.

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

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

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

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

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

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

Malaise ….

• Metals Malaise Weighs On Equity Markets (CNBC)

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

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

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

Hussman’s got it.

• The Broken Backbone of the Ponzi Economy (Hussman)

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

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

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

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

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

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

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

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

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

I agree, but not for the same reasons.

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

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

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

Didn’t he put them there?

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

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

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

All EU sinking.

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

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

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

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

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

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

Funny.

• Short Sellers Target China From The Shadows (Reuters)

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

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

Yes we do.

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

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

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

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

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

Big cheat.

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

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

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

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

No.2!

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

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

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

Debt Rattle Sep 21 2014: What Game Is Being Played With the US Dollar?

Sep 212014

September 21, 2014 Posted by Raúl Ilargi Meijer at 8:10 pm Finance Tagged with: dollar, Fed, interest rates, investors 8 Responses »

Russell Lee Hamburger stand in Harlingen, Texas Feb 1939

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

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

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

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

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

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

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

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

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

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

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

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

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

Currencies Back on Agenda as G-20 Monetary Policies Split

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

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

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

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

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

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

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

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

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

Dollar Has Longest Winning Streak Since 1967 on Divergence

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

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

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

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

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

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

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

Dollar’s Rally Bad News For Oil, Multinationals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

!!!

• Families Of German MH17 Victims To Sue Ukraine (Reuters)

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

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

Idiots.

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

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

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

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

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

Too late.

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

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

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

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

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

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

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

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

Word.

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

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

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

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

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

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

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

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

They know how to do it.

• French Farmers Torch Tax Office In Brittany Protest (BBC)

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

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

Word.

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

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

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

• 8 Ways The Obama Administration Is Blocking Information (AP)

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

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

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

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

Far too many people missing.

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

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

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

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

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

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

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

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

America can’t make a decent car anymore.

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

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

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

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

• Climate Change Changes Everything (Amy Goodman)

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

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

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

Hmmm.

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

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

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