Jul 312016
 
 July 31, 2016  Posted by at 10:13 pm Finance Tagged with: , , , , , , , , , , ,  4 Responses »


Vincent van Gogh Branches Of An Almond Tree In Blossom in Red 1890

Think about it for a second: If America -and UK, France- were to announce today that they would immediately cease bombing Syria, Iraq, Libya, Afghanistan, would the US be any less safe? Would Europe?

How about if we’d promise to spend all the billions saved by not throwing bombs on them, to help rebuild these countries? Would that make us less safe, from terrorists, from anyone at all? Do you think ‘they’ would ‘hate’ us for that?

It becomes a pretty stupid non-discussion pretty fast, doesn’t it?

 

 

Jul 102016
 
 July 10, 2016  Posted by at 8:42 am Finance Tagged with: , , , , , , , , , , ,  6 Responses »


G.G. Bain Political museums, Union Square, New York 1909

Bank Earnings Loom Large As Stocks Near Record on Wall Street (R.)
The Epic Collapse Of The World’s Most Systemically Dangerous Bank (ZH/VC)
Bank of England Considers Curbs On Property Funds (R.)
China June Inflation Eases Further, More Policy Stimulus Anticipated (R.)
China Healthcare Costs Forcing Patients Into Crippling Debt (R.)
Gorbachev: ‘The Next War Will Be the Last’ (Sputnik)
Blair’s Deputy PM Says Iraq Invasion Broke International Law (BBC)
Families Of Soldiers Killed In Iraq Vow To Sue Blair For ‘Every Penny’ (Tel.)
Australia’s Other Great Reef Is Also Screwed (Atlantic)
10,000 Hectares Of Mangroves Die Across Northern Australia (ABC.au)
Global Insect Populations Fall 45% In Past 40 Years (e360)

 

 

Markets are now completely divorced from reality.

Bank Earnings Loom Large As Stocks Near Record on Wall Street (R.)

The focus on Wall Street will shift to corporate earnings next week after a strong June jobs report on Friday gave investors confidence that the U.S. economy was on stable footing and left the S&P 500 within a whisper of a new closing record high. Earnings next week are expected from big banks JPMorgan, Citigroup and Wells Fargo as well as other financial companies such as BlackRock and PNC Financial Services. Earnings for the sector are expected to decline 5.4%. If bank earnings come in better than expected, the S&P 500 is likely to push through its record highs set in May 2015 after several failed attempts, as Friday’s jobs number helped push the benchmark index to less than one point from its closing record high of 2,130.82.

“Banks are definitely in the spotlight,” said Tim Ghriskey, CIO of Solaris Group in Bedford Hills, New York. “There is some trepidation in the market going into this earnings season, the quarter economically was not particularly strong.” Financials have been the worst performing of the 10 major S&P sector groups this year, down nearly 6%, as they were hit by reduced expectations for a U.S. interest rate hike by the Federal Reserve and uncertainty in the wake of “Brexit.” Second-quarter earnings overall are expected to decline 4.7%, according to Thomson Reuters data, the fourth straight quarter of negative earnings, but up slightly from the 5% decline in the first quarter.

Investors will be looking for confirmation this quarter that earnings are starting to turn, with analysts anticipating a return to growth in the back half of the year, starting with expectations for a 1.8% increase in the third quarter.

Read more …

Two things still stuck in German media (Google translate for them is awful) as I write this: the chief economist for Deutsche Bank calls for a €150 billion bailout for European banks, and German top-economist Hans-Werner Sinn says Finland will be next to leave EU and first to leave eurozone.

The Epic Collapse Of The World’s Most Systemically Dangerous Bank (ZH/VC)

It’s been almost 10 years in the making, but the fate of one of Europe’s most important financial institutions appears to be sealed. After a hard-hitting sequence of scandals, poor decisions, and unfortunate events,Visual Capitalist’s Jeff Desjardins notes that Frankfurt-based Deutsche Bank shares are now down -48% on the year to $12.60, which is a record-setting low. Even more stunning is the long-term view of the German institution’s downward spiral. With a modest $15.8 billion in market capitalization, shares of the 147-year-old company now trade for a paltry 8% of its peak price in May 2007.

If the deaths of Lehman Brothers and Bear Stearns were quick and painless, the coming demise of Deutsche Bank has been long, drawn out, and painful. In recent times, Deutsche Bank’s investment banking division has been among the largest in the world, comparable in size to Goldman Sachs, JP Morgan, Bank of America, and Citigroup. However, unlike those other names, Deutsche Bank has been walking wounded since the Financial Crisis, and the German bank has never been able to fully recover. It’s ironic, because in 2009, the company’s CEO Josef Ackermann boldly proclaimed that Deutsche Bank had plenty of capital, and that it was weathering the crisis better than its competitors.

It turned out, however, that the bank was actually hiding $12 billion in losses to avoid a government bailout. Meanwhile, much of the money the bank did make during this turbulent time in the markets stemmed from the manipulation of Libor rates. Those “wins” were short-lived, since the eventual fine to end the Libor probe would be a record-setting $2.5 billion. The bank finally had to admit that it actually needed more capital. In 2013, it raised €3 billion with a rights issue, claiming that no additional funds would be needed. Then in 2014 the bank head-scratchingly proceeded to raise €1.5 billion, and after that, another €8 billion. In recent years, Deutsche Bank has desperately been trying to reinvent itself.

Having gone through multiple CEOs since the Financial Crisis, the latest attempt at reinvention involves a massive overhaul of operations and staff announced by co-CEO John Cryan in October 2015. The bank is now in the process of cutting 9,000 employees and ceasing operations in 10 countries. This is where our timeline of Deutsche Bank’s most recent woes begins – and the last six months, in particular, have been fast and furious. Deutsche Bank started the year by announcing a record-setting loss in 2015 of €6.8 billion. Cryan went on an immediate PR binge, proclaiming that the bank was “rock solid”. German Finance Minister Wolfgang Schäuble even went out of his way to say he had “no concerns” about Deutsche Bank. Translation: things are in full-on crisis mode.

Read more …

Just in time delivery?!

Bank of England Considers Curbs On Property Funds (R.)

The Bank of England is considering curbs on withdrawals from property investment funds after Britain’s vote to leave the EU roiled the sector, the Sunday Telegraph newspaper said late on Saturday. The paper said it understood that the BoE was considering “enforced notice periods before redemptions, slashing the price for investors who rush to the door, or additional liquidity requirements for funds”. Andrew Bailey, the head of Britain’s Financial Conduct Authority, told a BoE news conference on Tuesday that the structure of open-ended real estate funds needed to be reviewed, as investors rushed to cash in their investments.

The BoE – where Bailey was deputy governor until he moved to the FCA this month – last year expressed concern about funds that invest in assets which can become illiquid in a crisis, but allow investors to withdraw funds without notice. On Friday the FCA issued guidance to property funds to avoid disadvantaging investors who had not sought to redeem funds. The Telegraph said regulators were considering requiring funds to ask investors to give a notice period of 30 days to six months for redemptions, or to hold more liquid assets to meet withdrawals, such as cash or shares and bonds in property-related companies. More than six British property funds suspended withdrawals last week to tackle a tide of redemptions after the June 23 vote to leave the EU unnerved investors who are worried that the uncertainty will hit demand to rent and buy commercial property.

Read more …

As I said, China’s entered deflation.

China June Inflation Eases Further, More Policy Stimulus Anticipated (R.)

China’s June consumer inflation grew at its slowest pace since January as increases in food prices eased, while producer prices extended their decline, reinforcing economists’ views that more government stimulus steps will be needed to support the economy. The consumer price index (CPI) rose 1.9% in June from a year earlier, compared with a 2.0% increase in May, the National Bureau of Statistics said on Sunday. Analysts had expected a 1.8% gain, a Reuters poll showed. Consumer inflation has remained low compared with the official target of around 3% for this year, indicating persistently weak demand in the world’s second-largest economy. Food prices were up 4.6% in June, compared with a 5.9% gain in the previous month.

Prices of China’s staple meat pork rose 30.1%, compared with a 33.6% increase in May. But recent flooding in China “is likely to push vegetable and fruit prices higher in the coming months,” ANZ economists Raymond Yeung and Louis Lam wrote in a research note. Non-food prices inched up 1.2% in June versus May’s 1.1% gain. “In our view, while China reiterates the importance of supply-side reform due to debt and overcapacity concerns, the authorities still need to stimulate demand in order to achieve its growth target,” Zhou Hao, senior Asia emerging market economist at Commerzbank in Singapore, said in a note. The People’s Bank of China last cut interest rates on Oct. 23, the seventh time since late 2014, as the government took steps to counter slowing economic growth.

Read more …

Hmmm. Which other country does this remind you of? Official data show up to 44% of families pushed into poverty were impoverished by illness. Does that sound like communism to you?

China Healthcare Costs Forcing Patients Into Crippling Debt (R.)

As China’s medical bills rise steeply, outpacing government insurance provision, patients and their families are increasingly turning to loans to pay for healthcare, adding to the country’s growing burden of consumer debt. While public health insurance reaches nearly all of China’s 1.4 billion people, its coverage is basic, leaving patients liable for about half of total healthcare spending, with the proportion rising further for serious or chronic diseases such as cancer and diabetes. That is likely to get significantly worse as the personal healthcare bill soars almost fourfold to 12.7 trillion yuan ($1.9 trillion) by 2025, according to Boston Consulting Group estimates. For many, like Li Xinjin, a construction materials trader whose son was diagnosed with leukemia in 2009, that means taking on crippling debt.

Li, from Cangzhou in Hebei province, scoured local papers and websites for small lenders to finance his son’s costly treatment at a specialist hospital in Beijing, running up debts of more than 1.7 million yuan, about 10 times his typical annual income. “At that time, borrowing money and having to make repayments, I was very stressed. Every day I worried about this,” said Li, 47, adding that he and his wife had at times slept rough on the streets near the hospital. “But I couldn’t let my son down. I had to try to save him,” he said. Li’s boy died last year. The debts will weigh him down for a few more years yet. Medical loans are just part of China’s debt mountain – consumer borrowing has tripled since 2010 to nearly 21 trillion yuan, and in eight years household debt relative to the economy has doubled to nearly 40% – but they are growing.

That is luring big companies like Ping An Insurance, as well as small loan firms and P2P platforms, as China’s traditional savings culture proves inadequate to the challenge of such heavy costs. The stress is particularly apparent in lower-tier cities and rural areas where insurance has failed to keep pace with rising costs, said Andrew Chen, Shanghai-based healthcare head for consultancy Parthenon-EY. “It’s a storm waiting to happen where patients from rural areas will have huge financial burdens they didn’t have to face before,” he said, adding people would often take second mortgages on their homes or turn to community finance schemes.

Read more …

“..In the current situation…all political, economic, diplomatic and cultural forces should be engaged to pacify the world..”

Gorbachev: ‘The Next War Will Be the Last’ (Sputnik)

Former Soviet President Mikhail Gorbachev declared in an interview with radio station Echo Moskvy that if the crisis escalates to another war, this war will be the last. NATO leaders agreed on Friday to deploy military forces to the Baltic states and eastern Poland while increasing air and sea patrols to demonstrate readiness to defend eastern members against the alleged ‘Russian aggression.’ Mikhail Gorbachev reportedly said after the summit that the decisions made at NATO summit in Warsaw should be regarded as a preparation for a hot war with Russia. On Saturday, Gorbachev told Echo Moskvy in an interview that he sticks to what he had said earlier and that he considers NATO decisions short-sighted and dangerous.

“Such steps lead to tension and disruption. Europe is splitting, the world is splitting. This is a wrong path for the global community” He said. “There are too many global and individual crises to abandon cooperation. It is essential to revive the dialogue.” According to the ex Soviet President, by irresponsibly deploying four multinational battalions to Russian borders, “within shooting distance”, the alliance draws closer another Cold War and another Arms Race. “There are still ways to…avoid military action.” Gorbachev stressed. “I would say that UN should be called upon on that matter.” He also called on Moscow not to respond to provocations but to come to the negotiating table. “In the current situation…all political, economic, diplomatic and cultural forces should be engaged to pacify the world. Mind you, the next war will be the last.”

Read more …

Closing the net on Tony.

Blair’s Deputy PM Says Iraq Invasion Broke International Law (BBC)

John Prescott, who was deputy prime minister when Britain went to war with Iraq in 2003, says the invasion by UK and US forces was “illegal”. Writing in the Sunday Mirror, he said he would live with the “catastrophic decision” for the rest of his life. Lord Prescott said he now agreed “with great sadness and anger” with former UN secretary general Kofi Annan that the war was illegal. He also praised Labour’s Jeremy Corbyn for apologising on the party’s behalf. Lord Prescott also said Prime Minister Tony Blair’s statement that “I am with you, whatever” in a message to US President George W Bush before the invasion in March 2003, was “devastating”.

“A day doesn’t go by when I don’t think of the decision we made to go to war. Of the British troops who gave their lives or suffered injuries for their country. Of the 175,000 civilians who died from the Pandora’s Box we opened by removing Saddam Hussein,” he went on. Lord Prescott said he was “pleased Jeremy Corbyn has apologised on behalf of the Labour Party to the relatives of those who died and suffered injury”. He also expressed his own “fullest apology”, especially to the families of British personnel who died. The former deputy PM said the Chilcot report had gone into great detail about what went wrong, but he wanted to identify “certain lessons we must learn”.

“My first concern was the way Tony Blair ran Cabinet. We were given too little paper documentation to make decisions,” he wrote. No documentation was provided to justify Attorney-general Lord Goldsmith’s opinion that action against Iraq was legal, he added.

Read more …

…and taking all his money too…

Families Of Soldiers Killed In Iraq Vow To Sue Blair For ‘Every Penny’ (Tel.)

Tony Blair will be pursued through the courts for “every penny” of the fortune he has earned since leaving Downing Street, the families of soldiers killed in Iraq vowed. Mr Blair faces a civil law suit over allegations he abused his power as prime minister to wage war in Iraq. The damages, according to legal sources close to the case, are unlimited. A well-placed source told The Telegraph that the Chilcot report appeared to provide grounds for the launch of a lawsuit. “It gives us a lot of threads to pursue and those threads make a powerful rope to catch him,” said the source. So far 29 families of dead soldiers have asked the law firm McCue & Partners to pursue a claim against Mr Blair. Others are expected to come on board.

The firm is looking at bringing a civil case of misfeasance in public office, which would see Mr Blair dragged through the courts for the first time over his decision to take the UK to war. Legal sources say for any case to be successful, lawyers would have to show that Mr Blair “had acted in excess of his powers” and that in doing so “harm has been caused and that the harm could have been predicted”. Sir John Chilcot, in his findings published on Wednesday, said Mr Blair should have seen the problems that resulted from the invasion in 2003 and came as he could to suggesting the military action was illegal.

Mr Blair has earned a fortune estimated at as much as £60 million since resigning as prime minister in 2007, largely through a complex network of companies that offers investment and strategic advice to private companies and international governments. Reg Keys, whose son Tom was one of six Royal Military Police killed at Majar al-Kabir in 2003, said: “Tony Blair has made a lot of money from public office which I believe he misused. He misused the powers of that office and has gone on to make a lot of money after leaving that office, a lot of it from the contacts he made while in Downing Street.”[..] “I would like to see him stripped of every penny he has got. I would like to see him dragged through the civil courts.”

Read more …

Runs along the entire south coast of the continent.

Australia’s Other Great Reef Is Also Screwed (Atlantic)

Imagine arriving at a region famed for its forests—the Pyrenees or the Rockies, perhaps—and discovering that all the trees had vanished. Where just a few years ago there were trunks and leaves, now there is only moss. That’s how Thomas Wernberg and Scott Bennett felt in 2013, when they dropped into the waters of Kalbarri, halfway up the western coast of Australia.

They last dived the area in 2010. Then, as in the previous decade, they had swum among vast forests of kelp—a tagliatelle-like seaweed whose meter-tall fronds shelter lush communities of marine life. But just three years later, the kelps had disappeared. The duo searched for days and found no traces of them. They only saw other kinds of seaweed, growing in thin, patchy, and low-lying lawns. “We thought we were in the wrong spot,” says Bennett. “It was like someone had bulldozed the reef. It was like a moonscape underwater—scungy, brown, and empty.”

The culprit—surprise, surprise—is climate change. The waters near western Australia were already among the fastest-warming regions in the oceans before being pummeled by a recent series of extreme heat waves. In the summer of 2011, temperatures rose to highs not seen in 215 years of records, highs far beyond what kelps, which prefer milder conditions, can tolerate. As a result, the kelp forests were destroyed. Before the heat wave, the kelps stretched over 800 kilometers of Australia’s western flank and cover 2,200 square kilometers. After the heat wave, Wernberg and Bennett found that 43% of these forests disappeared, including almost all the kelps from the most northerly 100 kilometers of the range. “It was just heartbreaking,” says Bennett.

“It really brought home to me the impact that climate change can have on these ecosystems, right under our noses.” “They have provided alarming and detailed evidence for one of the most dramatic climate-driven ecosystem shifts ever recorded,” adds Adriana Verges from the University of New South Wales.

Read more …

Soon, Australia will have only barren coasts left.

10,000 Hectares Of Mangroves Die Across Northern Australia (ABC.au)

Close to 10,000 hectares of mangroves have died across a stretch of coastline reaching from Queensland to the Northern Territory. International mangroves expert Dr Norm Duke said he had no doubt the “dieback” was related to climate change. “It’s a world-first in terms of the scale of mangrove that have died,” he told the ABC. Dr Duke flew 200 kilometres between the mouths of the Roper and McArthur Rivers in the Northern Territory last month to survey the extent of the dieback. He described the scene as the most “dramatic, pronounced extreme level of dieback that I’ve ever observed”.

Dr Duke is a world expert in mangrove classification and ecosystems, based at James Cook University, and in May received photographs showing vast areas of dead mangroves in the Northern Territory section of the Gulf of Carpentaria. Until that time he and other scientists had been focused on mangrove dieback around Karmuba, Queensland, at the opposite end of the Gulf. “The images were compelling. They were really dramatic, showing severe dieback of mangrove shoreline fringing — areas just extending off into infinity,” Dr Duke said. “Certainly nothing in my experience had prepared me to see images like that.”

Dr Duke said he wanted to discover if the dieback in the two states was related. “We’re talking about 700 kilometres of distance between incidences at that early time,” he said. The area the Northern Territory photos were taken in was so remote the only way to confirm the extent and timing of the mangrove dieback was with specialist satellite imagery. With careful analysis the imagery confirmed the mangrove dieback in both states had happened in the space of a month late last year, coincident with coral bleaching on the Great Barrier Reef. “We’re talking about 10,000 hectares of mangroves were lost across this whole 700 kilometre span,” Dr Duke said.

Read more …

It doesn’t get much scarier than this, without insects mankind doesn’t stand a chance: ”..out of 3,623 terrestrial invertebrate species on the International Union for Conservation of Nature [IUCN] Red List, 42% are classified as threatened with extinction.”

Global Insect Populations Fall 45% In Past 40 Years (e360)

Every spring since 1989, entomologists have set up tents in the meadows and woodlands of the Orbroicher Bruch nature reserve and 87 other areas in the western German state of North Rhine-Westphalia. The tents act as insect traps and enable the scientists to calculate how many bugs live in an area over a full summer period. Recently, researchers presented the results of their work to parliamentarians from the German Bundestag, and the findings were alarming: The average biomass of insects caught between May and October has steadily decreased from 1.6 kilograms (3.5 pounds) per trap in 1989 to just 300 grams (10.6 ounces) in 2014.


According to global monitoring data for 452 species, there has been a 45% decline in invertebrate populations over the past 40 years.

“The decline is dramatic and depressing and it affects all kinds of insects, including butterflies, wild bees, and hoverflies,” says Martin Sorg, an entomologist from the Krefeld Entomological Association involved in running the monitoring project. Another recent study has added to this concern. Scientists from the Technical University of Munich and the Senckenberg Natural History Museum in Frankfurt have determined that in a nature reserve near the Bavarian city of Regensburg, the number of recorded butterfly and Burnet moth species has declined from 117 in 1840 to 71 in 2013. “Our study reveals, through one detailed example, that even official protection status can’t really prevent dramatic species loss,” says Thomas Schmitt, director of the Senckenberg Entomological Institute.

Declines in insect populations are hardly limited to Germany. A 2014 study in Science documented a steep drop in insect and invertebrate populations worldwide. By combining data from the few comprehensive studies that exist, lead author Rodolfo Dirzo, an ecologist at Stanford University, developed a global index for invertebrate abundance that showed a 45% decline over the last four decades. Dirzo points out that out of 3,623 terrestrial invertebrate species on the International Union for Conservation of Nature [IUCN] Red List, 42% are classified as threatened with extinction.

Read more …

Jan 242016
 
 January 24, 2016  Posted by at 7:56 am Finance Tagged with: , , , , , , , ,  5 Responses »


Harris&Ewing “Street scene with snow, F STreet Washington, DC” 1918

Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)
American Oil Companies Are Starting To Scream “Mayday” (CNN)
US Shale’s Big Squeeze (FT)
Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)
US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)
Ideological Divisions Undermine Economics (Economist)
A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)
Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)
Germany Scolds Austria For Greek Schengen Threats (AFP)
EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The battle gets ugly.

Iraq Sells Oil For $22 A Barrel, Calls For IMF Help (BBG)

Prime Minister Haidar al-Abadi said the plunge in oil prices means Iraq needs IMF support to continue its fight against Islamic State, a battle he says his country is winning despite little support from its neighbors. “We’ve been anticipating there would be some drop of prices but this has taken us by surprise,” Abadi said of the oil collapse in an interview at the World Economic Forum in Davos, Switzerland. “We can defeat Daesh but with this fiscal problem, we need the support” of the IMF, he said. “We have to sustain the economy, we have to sustain our fight.” The conflict with Islamic State, which swept through swaths of northern Iraq in the summer of 2014, has destroyed economic infrastructure, disrupted trade and discouraged investment.

Iraq is now facing the “double shock” of war as well as the crude-oil price drop, and has “urgent” balance-of-payment and budget needs, the IMF said in January as it approved a staff-monitored program to pave the way for a possible loan. Under the program, Iraq will seek to reduce its non-oil primary deficit. “We have cut a lot of our expenditures, government expenditures,” Abadi said in the interview. But the war brings its own costs. “We are paying salaries for the uniformed armies, for our fighters” and their weapons, Abadi said in Davos. Speaking later in a panel session in the Swiss resort, Abadi said Iraqi oil sold on Thursday for $22 a barrel, and after paying costs the country is left with $13 per barrel.

He called for neighbors to do more to help. The only country to have provided financial assistance is Kuwait, he said, which gave Iraq $200 million. “Daesh is on the retreat and it is collapsing but somebody is sending a life line to them,” Abadi said, citing victories for his forces in the key western city of Ramadi and using an Arabic acronym for Islamic State. “Neighbors are fighting for supremacy, using sectarianism.” Shiite Iran supports several of the biggest militias aiding Iraqi forces in the fight against Islamic State. Its rivalry with the Middle East’s biggest Sunni power, Saudi Arabia, has flared in recent weeks, complicating efforts to end conflicts in Iraq, Syria and Yemen. Iraq has managed to stop the advance of Islamic State in Iraq but if neighbors continue to inflame sectarianism, successes can be reversed, he said. “We are supposed to be in the same boat,” Abadi said. “In reality, we aren’t.”

Read more …

“..42nd driller to file for bankruptcy in this commodity crunch..”

American Oil Companies Are Starting To Scream “Mayday” (CNN)

Last year, 42 North American drillers filed for bankruptcy, according to law firm Haynes and Boone. It’s only likely to get worse this year. Experts say there are a lot of parallels between today’s crisis and the last oil crash in 1986. Back then, 27% of exploration and production companies went bust. Defaults are skyrocketing again. In December, exploration and production company defaults topped 11%, up from just 0.5% the previous year, according to Fitch Ratings. That’s a 2,000%-plus jump. It’s just the beginning, says John La Forge, head of real assets strategy at Wells Fargo. If history repeats, people should prepare for the default rate to double in the next year or so. No wonder America’s biggest banks are setting aside a lot of money in anticipation that more energy companies will go belly up.

Energy companies borrowed a lot of money when oil was worth over $100 a barrel. The returns seemed almost guaranteed if they could get the oil out of the ground. But now oil is barely trading just above $30 a barrel and a growing number of companies can’t pay back their debts. “The fact that a price below $100 seemed inconceivable to so many is kind of astonishing,” says Mike Lynch, president of Strategic Energy and Economic Research. “A lot of people just threw money away thinking the price would never go down.” On the last day of 2015, Swift Energy, an “independent oil and gas company” headquartered in Houston, became the 42nd driller to file for bankruptcy in this commodity crunch. The company is trying to sort out over $1 billion in debt at a time when the firm’s earnings have declined over 70% in the past year.

Trimming costs and laying off workers can’t close that kind of gap. “In the 1980s, there was a bumper sticker that people in Texas had that said, ‘God give me one more boom and I promise not to screw it up,'” says Lynch. “People should have those bumper stickers ready again.” The last really big oil bust was in the late 1980s. The Saudis really controlled the price then, says La Forge. Now the Saudis (and other members of OPEC) are in a battle with the United States, which has become a major player again in energy production. No one wants to cut back on production and risk losing market share. “It will be the U.S. companies that go out of business,” predicts La Forge. OPEC countries don’t have a lot of smaller players like the United States does. It’s usually the government that controls oil drilling and production in OPEC nations.

La Forge predicts the governments can hold their position longer. As the smaller players run out of cash, they will get swallowed up by bigger ones. “The big boys and girls will snap up a lot of cheap assets,” predicts Lynch. There’s a lot of debate about whether oil prices have bottomed out. Crude oil hit its lowest price since 2003 this week. But even if prices have stabilized, the worst isn’t over for oil companies. “Some companies went under in 1986-’87 even when prices rebounded,” says La Forge. This week, Blackstone (BGB) CEO Stephen Schwarzman said his firm is finally taking a close look at bargains in the energy sector. One of the largest bankruptcies so far is Samson Resources of Oklahoma. In 2011, private equity firm KKR (KKR) bought it for over $7 billion. Now it’s struggling to deal with over $1 billion in debt that’s due this year alone.

Read more …

Can’t read on shale without mention of default anymore.

US Shale’s Big Squeeze (FT)

The boom years left the US oil industry deep in debt. The 60 leading US independent oil and gas companies have total net debt of $206bn, from about $100bn at the end of 2006. As of September, about a dozen had debts that were more than 20 times their earnings before interest, tax, depreciation and amortisation. Worries about the health of these companies have been rising. A Bank of America Merrill Lynch index of high-yield energy bonds, which includes many indebted oil companies, has an average yield of more than 19%. Almost a third of the 155 US oil and gas companies covered by Standard & Poor’s are rated B-minus or below, meaning they are at high risk of default.

The agency this month revised down its expectations of future oil prices, meaning that many of those companies’ ratings are likely to be cut even further. Credit ratings for the more financially secure investment grade companies are also likely to be lowered this time. Some companies under financial strain will be able to survive by selling assets. Private capital funds raised $57bn last year to invest in energy, according to Preqin, an alternative assets research service, and most of that money is still looking for a home. Companies with low-quality assets or excessive debts will not make it. Tom Watters of S&P expects “a lot more defaults this year”. Bankruptcies, a cash squeeze and poor returns on investment mean companies will continue to cut their capital spending.

The number of rigs drilling oil wells in the US has dropped 68% from the peak in October 2014 to 510 this week, and it is likely to fall further. So far, the impact on US oil production has been minimal. Output in October was down 4% from April, as hard-pressed companies squeeze as much revenue as possible out of their assets. Saudi Arabia’s strategy of allowing oil prices to fall to curb competing sources of production appears to be succeeding But Harold Hamm, chief executive of Continental Resources, one of the pioneers of the shale boom, says the downturn in activity is likely to intensify. “We’re seeing capex being slashed to almost nothing,” he says. “At low prices, people aren’t going to keep producing.” He expects US oil production to fall sharply this year, and says people may be surprised by how fast it goes.

Read more …

Poor banks.

Squeezed Primary Dealers Quit European Government Bond Markets (Reuters)

A rise in the number of banks giving up primary dealer roles in European government bond markets threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money. Increased regulation and lower margins have seen five banks exit various countries in the last three months. Others look set to follow, further eroding the infrastructure through which governments raise debt. While these problems are for now masked by the European Central Bank buying €60 billion of debt every month to try to stimulate the euro zone economy, countries may feel the effects more sharply when the ECB scheme ends in March 2017. Since 2012, most euro zone governments have lost one or two banks as primary dealers, while Belgium – one of the bloc’s most indebted states – is down five.

Primary dealers are integral to government bond markets, buying new issues at auctions to service demand from investors and to maintain secondary trading activity. Without their support, countries would find it harder to sell debt, forcing them to offer investors higher interest rates. Over the last quarter alone, Credit Suisse pulled out of most European countries, ING quit Ireland, Commerzbank left Italy, and Belgium did not re-appoint Deutsche Bank as a primary dealer and dropped Nordea as a recognised dealer. In that time, only Danske Bank has added to its primary dealer roles in the bloc’s main markets. But even Danske is worried. “I’ve never seen it so bad,” said Soeren Moerch, head of fixed income trading at Danske Markets.

“When further banks reduce their willingness to be a primary dealer then liquidity will go even lower…we could have more failed auctions and we could see a big washout in the market.” Acting as a dealer has become increasingly expensive for banks under new regulations because of the amount of capital it requires, while trading profits that once made up for the initial spend have diminished in an era of ultra-low rates. “Shareholders would be shocked if they knew the scale of the costs that some businesses are taking,” said one banker who has worked at several major investment houses with primary dealer functions. The decline in dealers comes as many of the world’s largest financial firms, such as Morgan Stanley and Deutsche Bank, launch strategic reviews that are likely to impact their fixed income operations.

The risk that the euro zone could slide back into recession, having barely recovered from its long-running debt crisis, could exacerbate the withdrawal by prompting banks to retreat into their home markets. “It is a negative trend. The opposite that we saw in the first 10 years of the euro,” said Sergio Capaldi at Intesa SanPaolo. “For smaller countries…the fact that there are less players is something that could have a negative affect on market liquidity and borrowing costs.”

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Squeezed them for all they’re worth.

US Banks Cut Off Mexican Clients as Regulatory Pressure Increases (WSJ)

U.S. banks are cutting off a growing number of customers in Mexico, deciding that business south of the border might not be worth the risks in the wake of mounting regulatory warnings. At issue are correspondent-banking relationships that allow Mexican banks to facilitate cross-border transactions and meet their clients’ needs for dealing in dollars—in effect, giving them access to the U.S. financial system. The global firms that provide those services are increasingly wary of dealing with Mexican banks as well as their customers, according to U.S. bankers and people familiar with the matter.

The moves are consistent with a broader shift across the industry, in which banks around the world are retreating from emerging markets as regulators ramp up their scrutiny and punishment of possible money laundering. For many banks, the money they can earn in such countries isn’t worth the cost of compliance or the penalties if they step across the line. U.S. financial regulators have long warned about the risks in Mexico of money laundering tied to the drug trade. The urgency spiked more than a year ago, when the Financial Crimes Enforcement Network, a unit of the Treasury Department, sent notices warning banks of the risk that drug cartels were laundering money through correspondent accounts, people familiar with the advisories said. Earlier, the Office of the Comptroller of the Currency sent a cautionary note to some big U.S. banks about their Mexico banking activities.

But the pain Mexican firms are experiencing is relatively new. The fallout is affecting Mexican banks of various sizes such as Grupo Elektra’s Banco Azteca, Grupo Financiero Banorte and Monex Grupo Financiero, and their customers, the people said. Regulators have consistently said they don’t direct banks to cut ties with specific countries or a large swath of customers. But the advisories, which had nonpublic components that haven’t been previously reported, were interpreted by several big banks as a fresh signal that they do business in Mexico at their own peril, according to people familiar with the matter. “All they know is that sanctions are big and revenues are small,” said Luis Niño de Rivera, vice chairman of Banco Azteca, based in Mexico City. “It’s simple arithmetic: ‘I make a million dollars and they’re going to fine me a billion? I won’t do that.’”

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A field of pretense.

Ideological Divisions Undermine Economics (Economist)

Dismal may not be the most desirable of modifiers, but economists love it when people call their discipline a science. They consider themselves the most rigorous of social scientists. Yet whereas their peers in the natural sciences can edit genes and spot new planets, economists cannot reliably predict, let alone prevent, recessions or other economic events. Indeed, some claim that economics is based not so much on empirical observation and rational analysis as on ideology. In October Russell Roberts, a research fellow at Stanford University’s Hoover Institution, tweeted that if told an economist’s view on one issue, he could confidently predict his or her position on any number of other questions. Prominent bloggers on economics have since furiously defended the profession, citing cases when economists changed their minds in response to new facts, rather than hewing stubbornly to dogma.

Adam Ozimek, an economist at Moody’s Analytics, pointed to Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, who flipped from hawkishness to dovishness when reality failed to affirm his warnings of a looming surge in inflation. Tyler Cowen, an economist at George Mason, published a list of issues on which his opinion has shifted (he is no longer sure that income from capital is best left untaxed). Paul Krugman chimed in. He changed his view on the minimum wage after research found that increases up to a certain point reduced employment only marginally (this newspaper had a similar change of heart). Economists, to be fair, are constrained in ways that many scientists are not. They cannot brew up endless recessions in test tubes to work out what causes what, for instance.

Yet the same restriction applies to many hard sciences, too: geologists did not need to recreate the Earth in the lab to get a handle on plate tectonics. The essence of science is agreeing on a shared approach for generating widely accepted knowledge. Science, wrote Paul Romer, an economist, in a paper* published last year, leads to broad consensus. Politics does not. Nor, it seems, does economics. In a paper on macroeconomics published in 2006, Gregory Mankiw of Harvard University declared: “A new consensus has emerged about the best way to understand economic fluctuations.” But after the financial crisis prompted a wrenching recession, disagreement about the causes and cures raged. “Schlock economics” was how Robert Lucas, a Nobel-prize-winning economist, described Barack Obama’s plan for a big stimulus to revive the American economy. Mr Krugman, another Nobel-winner, reckoned Mr Lucas and his sort were responsible for a “dark age of macroeconomics”.

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Nice details.

A Greek Conspiracy: How The ECB Crushed Varoufakis’ Plans (Häring)

A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented. On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.

Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely. It has already been reported and discussed that a close aide of Stournaras sabotaged the government during this time by sending a memo to a financial journalist, which was very critical with the governments negotiation tactics and blamed it for the troubles of the banks, which the ECB had intensified, if not provoked.

A few days ago, Stournaras himself exposed a conspiracy. He bragged that he had convened former prime ministers and talked to the President of the Republic to raise a wall blocking Varoufakis emergency plan. In retrospect it looks as if Alexis Tsipras might have signed his capitulation to Stournaras and the ECB already in April 2015, when he replaced Varoufakis as chief negotiator by Euklid Tsakalotos, who would later become finance minister after Varoufakis resigned. In this case the nightly negotiating marathon in July, after which Tsipras publicly signed his capitulation, might just have been a show to demonstrate that he fought bravely to the end. Why would I suspect that? Because I learned in a Handelsblatt-Interview with Tsakalotos published on 15 January 2016 that he is a close friend of Stournaras. Looking around a bit more, I learned that Tsakalotos wife is ‘Director Advisor’ to the Bank of Greece.

This is the Wikipedia entry: “Heather Denise Gibson is a Scottish economist currently serving as Director-Advisor to the Bank of Greece (since 2011). She is the spouse of Euclid Tsakalotos, current Greek Minister of Finance.” At the time she entered, Stournaras was serving as Director General of a think tank of the Bank of Greece. The friendship of the trio goes back decades to their time together at a British university. They even wrote a book together in 1992. Thus: The former chief negotiator of the Greek government is and was a close friend of the central bank governor and the central bank governor was the boss of his wife. The governor of the Bank of Greece, which is part of the Eurosystem of central banks, gets his orders from the ECB, i.e. the opposing side in the negotiations. He actively sabotaged the negotiation strategy of his government. If this does not look like an inappropriate association for a chief negotiator, I don’t know what would.

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Someone grabbed Cameron by the nuts?

Britain ‘Poised To Open Door To Thousands Of Migrant Children’ (Guardian)

David Cameron is considering plans to admit thousands of unaccompanied migrant children into the UK within weeks, as pressure grows on ministers to provide a haven for large numbers of young people who have fled their war-torn homelands without their parents. Amid growing expectation that an announcement is imminent, Downing Street said ministers were looking seriously at calls from charities, led by Save the Children, for the UK to admit at least 3,000 unaccompanied young people who have arrived in Europe from countries including Syria and Afghanistan, and who are judged to be at serious risk of falling prey to people traffickers. Government sources said such a humanitarian gesture would be in addition to the 20,000 refugees the UK has already agreed to accept, mainly from camps on the borders of Syria, by 2020.

Following a visit to refugee camps in Calais and Dunkirk on Saturday, Labour leader Jeremy Corbyn called on Cameron to offer children not just a refuge in the UK but proper homes and education, equivalent to the welcome received by those rescued from the Nazis and brought to the UK in 1939. “We must reach out the hand of humanity to the victims of war and brutal repression,” he said. “Along with other EU states, Britain needs to accept its share of refugees from the conflicts on Europe’s borders, including the horrific civil war in Syria. “We have to do more. As a matter of urgency, David Cameron should act to give refuge to unaccompanied refugee children now in Europe – as we did with Jewish Kindertransport children escaping from Nazi tyranny in the 1930s.

And the government must provide the resources needed for those areas accepting refugees – including in housing and education – rather than dumping them in some of Britain’s poorest communities.” Signs that the prime minister may act came after a week in which concern has risen in European capitals, and among aid agencies and charities, about the high number of migrants still pouring into the EU just as cold weather bites along the routes many are taking through the Balkans and central and eastern Europe. With one week of January to go, about 37,000 migrants and refugees have already arrived in the EU by land or sea, roughly 10 times the equivalent total for the month last year. The number of Mediterranean deaths stands at 158 this year.

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It’s a free for all now.

Germany Scolds Austria For Greek Schengen Threats (AFP)

This week Greece slammed a Financial Times report saying several European ministers and senior EU officials believed threatening suspension from Schengen could persuade Greece to protect its borders more effectively. Junior interior minister for migration Yiannis Mouzalas said the report contained ”falsehoods and distortions” but Mikl-Leitner said temporary exclusion was a real possibility. “If the Athens government does not finally do more to secure the (EU’s) external borders then one must openly discuss Greece’s temporary exclusion from the Schengen zone,” Mikl-Leitner said in an interview with German daily Die Welt. “It is a myth that the Greco-Turkish border cannot be controlled,” Mikl-Leitner said.

“When a Schengen signatory does not permanently fulfil its obligations and only hesitatingly accepts aid then we should not rule out that possibility,” she added. “The patience of many Europeans has reached its limit ... We have talked a lot, now we must act. It is about protecting stability, order and security in Europe.” Germany’s Steinmeier criticised Vienna’s warning however. “There won’t be any solution to the refugee crisis if solidarity disappears,” he said. “On the contrary, we must work together and concentrate all our efforts to fight against the causes that are pushing the refugees into flight, to reinforce the EU’s outer borders and to achieve a fair redistribution (of asylum seekers) within Europe.”

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Chance of Schengen survival below zero.

EU Leaders Consider Two-Year Suspension Of Schengen Rules (Telegraph)

The Schengen system of free movement could be suspended for two years under emergency measures to be discussed by European ministers on Monday, as the French Prime Minister warned the crisis could bring down the entire European Union. Manuel Valls said that the “very idea of Europe” will be torn apart until the flows of migrants expected to surge in spring are turned away. On Monday, interior ministers from the EU will meet in Amsterdam to discuss emergency measures to allow states to reintroduce national border controls for two years. The powers are allowed under the Schengen rules, but would amount to an unprecedented abandonment of the 30-year old agreement that allows passport-free travel across 26 states. The measure could be brought in from May, when a six-month period of passport checks introduced by Germany expires.

The European Commission would have to agree that there are “persistent serious deficiencies” in the Schengen zone’s external border to activate it. “This possibility exists, it is there and the Commission is prepared to use it if need be,” said Natasha Bertaud, a spokesman for Jean-Claude Juncker. Greece has been blamed by states for failing to identify and register hundreds of thousands of people flowing over its borders. Other states that have introduced emergency controls are Sweden, Austria, France, Denmark and Norway, which is not in the EU but is in Schengen. “We’re not currently in that situation,” Ms Bertaud added. “But interior ministers will on Monday in Amsterdam have the opportunity to discuss and it’s on the agenda what steps should be taken or will need to be taken once we near the end of the maximum period in May.”

In a further blow, Mr Valls said that France would keep its state of emergency, which has included border checks, until the Islamic State of Iraq and Levant network is destroyed. “It is a total and global war that we are facing with terrorism,” he said. He warned that without proper border controls to turn away refugees, the 60-year old European project could disintegrate. “It’s Europe that could die, not the Schengen area. If Europe can’t protect its own borders, it’s the very idea of Europe that could be thrown into doubt. It could disappear, of course – the European project, not Europe itself, not our values, but the concept we have of Europe, that the founding fathers had of Europe.

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Jan 202015
 
 January 20, 2015  Posted by at 10:44 am Finance Tagged with: , , , , , , , , , , ,  5 Responses »


DPC The steamer Cincinnati off Manhattan 1900

IMF Lowers Global Growth Forecast by Most in Three Years (Bloomberg)
Chinese Growth at 7.4% Is the Slowest Since 1990 (Bloomberg)
China’s $20 Trillion Headache Underscored by Stock Swings (Bloomberg)
Warning! Volatility May Await If ECB Launches QE (CNBC)
Draghi Weighs QE Compromise Showcasing Unity Shortfall (Bloomberg)
Endgame for Central Bankers (Steen Jakobsen)
Denmark Strikes Back at Speculators and Burnishes Peg Defenses (Bloomberg)
Denmark Should Cut Loose From Euro (Bloomberg)
Swiss Upending Polish Mortgages Unnerves Bank Bondholders (Bloomberg)
Iraq Back From The Brink With Largest Oil Output Since 1979 (CNBC)
Price Collapse Hits Scavengers Who Scrape the Bottom of Big Oil (Bloomberg)
The Keystone XL Pipeline (Energy Matters)
A Huge Credit Line Reset Looms Over Oil Drillers (Bloomberg)
Janjuah On 2015: Oil At $30; Bonds To Go Crazy (CNBC)
U.S. Won’t Intervene in Oil Market (Bloomberg)
Saudi Arabia Can Last Eight Years On Low Oil Prices (Guardian)
Europe ‘Faces Political Earthquakes’ (BBC)
If The Fed Has Nothing To Hide, It Has Nothing To Fear (Ron Paul)
A Solemn Pause (Jim Kunstler)
Whiplash! (Dmitry Orlov)
Why New Zealand Can Handle Europe, Oil Troubles (CNBC)
Bleak Future For Retirees As Savings Slashed (CNBC)
Disease Threat To Wild Bees from Commercial Bees (BBC)

All that’s wrong, put in just a few words: “We want to make sure that when there’s an announcement, that it’s as large as what the market’s expecting.” The ECB should do what’s good for people, not what markets expect. That’s insiduous.

IMF Lowers Global Growth Forecast by Most in Three Years (Bloomberg)

The IMF made the steepest cut to its global-growth outlook in three years, with diminished expectations almost everywhere except the U.S. more than offsetting the boost to expansion from lower oil prices. The world economy will grow 3.5% in 2015, down from the 3.8% pace projected in October, the IMF said in its quarterly global outlook released late Monday. The lender also cut its estimate for growth next year to 3.7%, compared with 4% in October. The weakness, along with prolonged below-target inflation, is challenging policy makers across Europe and Asia to come up with fresh ways to stimulate demand more than six years after the global financial crisis.

“The world economy is facing strong and complex cross currents,” Olivier Blanchard, the IMF’s chief economist, said in the text of remarks at a press briefing Tuesday in Beijing. “On the one hand, major economies are benefiting from the decline in the price of oil. On the other, in many parts of the world, lower long-run prospects adversely affect demand, resulting in a strong undertow.” The IMF cut its outlook for consumer-price gains in advanced economies almost in half to 1% for 2015. Developing economies will see inflation this year of 5.7%, a 0.1 percentage point markup from October’s projections, the fund said. The growth-forecast reduction was the biggest since January 2012, when the fund lowered its estimate for expansion that year to 3.3% from 4% amid forecasts of a recession in Europe.

The IMF marked down 2015 estimates for places including the euro area, Japan, China and Latin America. The deepest reductions were in places suffering from crises, such as Russia, or for oil exporters including Saudi Arabia. IMF Managing Director Christine Lagarde outlined the sobering outlook in her first speech of the year last week, saying that oil prices and U.S. growth “are not a cure for deep-seated weaknesses elsewhere.” The U.S. is the exception. The IMF upgraded its forecast for the world’s largest economy to 3.6% growth in 2015, up from 3.1% in October. Cheap oil, more moderate fiscal tightening and still-loose monetary policy will offset the effects of a gradual increase in interest rates and the curb on exports from a stronger dollar, the fund said.

In Europe, weaker investment will overshadow the benefits of low oil prices, a cheaper currency and the European Central Bank’s anticipated move to expand monetary stimulus by buying sovereign bonds, according to the IMF. The fund lowered its forecast for the 19-nation euro area to 1.2% this year, down from 1.3% in October. The ECB should go “all in” in its bond-buying program, Blanchard said on Bloomberg TV. “We want to make sure that when there’s an announcement, that it’s as large as what the market’s expecting.”

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Why anyone would believe numbers like these is beyond me.

Chinese Growth at 7.4% Is the Slowest Since 1990 (Bloomberg)

China’s stimulus efforts began kicking in late last year, boosting industrial production and retail sales, and helping full-year economic growth come close to the government’s target. Gross domestic product rose 7.3% in the three months through December from a year earlier, compared with the median estimate of 7.2% in a Bloomberg News survey. GDP expanded 7.4% in 2014, the slowest pace since 1990 and in line with the government’s target of about 7.5%. The yuan and local stocks advanced after the release. A soft landing for China would help a global economy contending with weakness that spurred the IMF’s steepest cut to its world growth outlook in three years.

China’s central bank cut interest rates for the first time in two years in November and has added liquidity in targeted steps to buoy demand. “The economy’s performance in 2014 stands out against the widespread hard-landing fears that prevailed early last year,” said Tim Condon at ING in Singapore. “That the authorities were able to sustain close-to-target growth and increase the tempo of economic reforms –- shadow banking, local government finances -– and sustain the property-cooling measures demonstrates the effectiveness of the targeted measures.” “Markets should breathe a sigh of relief as the economy enters 2015 in a better shape than had been expected,” said Dariusz Kowalczyk at Credit Agricole in Hong Kong.

“The data lowers the need for further stimulus, but there remains some room for easing as risks are skewed to the downside.” [..] Quarter-on-quarter, China’s performance was less robust, slowing to 1.5% growth in the three months through December from 1.9% in the third quarter. “Growth momentum eased in the fourth quarter from the previous three months due to property-related weakness,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong. “Property starts deepened their decline, which also dragged down heavy industry and related investment. Property will continue to drag down growth this year.”

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China imitates the west: “Funds aren’t flowing into economic activities on the ground. Instead, people are adding leverage to speculate.”

China’s $20 Trillion Headache Underscored by Stock Swings (Bloomberg)

For China’s central bank, the 36% stock market rally through Jan. 16 spurred in part by a surprise November interest-rate cut is the latest reminder that it’s easier to unleash money than to guide it to the right places. Since Zhou Xiaochuan became People’s Bank of China governor in late 2002, the broad money supply base has expanded almost seven times to 122.8 trillion yuan ($20 trillion) while the economy has grown about five times. That translates to a M2/GDP ratio of about 200% versus about 70% in the U.S. That liquidity springs up like a jack-in-the-box, driving property prices, then shifting to stocks, before moving on to whatever may be next. Such sprees help explain the PBOC’s reluctance to cut banks’ required reserve ratios even as the economy slows. Instead, it’s trying targeted tools to guide money to preferred areas such as farming and small business.

“The central bank will continue to face structural challenges in 2015 and beyond,” said Shen Jianguang at Mizuho. “Funds aren’t flowing into economic activities on the ground. Instead, people are adding leverage to speculate.” China’s benchmark stock index plunged the most in six years on Monday in Shanghai, led by brokerages, after regulatory efforts to rein in record margin lending sparked concern that speculative traders will pull back from the world’s best-performing stock market in 2014. The move to control margin lending was to “pave the way for more monetary easing,” according to Zhu Haibin at JPMorgan in Hong Kong. The action was to stop future monetary easing from flowing into the stock market, Zhu said in an interview with Bloomberg Television today.

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“If we want to help governments that are in trouble let’s do it – but let the parliaments decide rather than this technocratic body, the ECB council.”

Warning! Volatility May Await If ECB Launches QE (CNBC)

One of Europe’s most influential economists has warned that the quantitative easing measures seen being unveiled by the ECB this week could create deep market volatility, akin to what was seen after the Swiss National Bank abandoned its currency peg. “There was so much capital flight in anticipation of the QE to Switzerland, that the Swiss central bank was unable to stem the tide, and there will be more effects of that sort,” the President of Germany’s Ifo Institute for Economic Research, Hans-Werner Sinn, told CNBC on Monday. This week, the ECB holds its two-day policy meeting and is widely seen unveiling a U.S. Federal Reserve-type government bond-purchasing program, known as quantitative easing or QE. Sinn, a fierce critic of QE, said the launch of such a program would bring more market volatility, of the kind seen on Thursday after the Swiss National Bank abandoned its euro/Swiss franc floor.

“He (ECB President Mario Draghi) will do it, and what will the markets do, they will happy to be able to sell the government bonds, which they consider as partly toxic and they will have a lot of cash. What will they do – they will buy real estate, there could be a revival of the real estate market but they will primarily try to take it abroad. And they have already begun doing that – what you see in Switzerland,” Sinn told CNBC. Sinn said that a ECB government bond-buying program would make markets “happy”, but that it was not the right way to go about bailing out the euro zone. “If we want to help governments that are in trouble let’s do it – but let the parliaments decide rather than this technocratic body, the ECB council. All these (QE) measures go way beyond monetary policy – these are bailout operations to help banks and states which are unable to cope with normal rates of interest,” Sinn told CNBC.

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What an incredible mess even before it’s been announced.

Draghi Weighs QE Compromise Showcasing Unity Shortfall (Bloomberg)

Mario Draghi is weighing how much a compromise on euro-area stimulus would reveal about the currency bloc’s fault lines. As the European Central Bank president and his Executive Board sit down today to formulate a bond-buying proposal to fend off deflation, one option is to ring-fence the risks by country. While that may win over some of Draghi’s opponents when the Governing Council meets on Jan. 22, it might also shine a spotlight on the lack of unity within the union. “An absence of risk-sharing could be taken as a bad signal by the market with respect to the singleness of monetary policy and could be self-defeating,” said Nick Matthews at Nomura. “However, it may prove to be a necessary compromise to make the design of QE more palatable for Governing Council members, and is preferable to having to limit the size of the program.”

Investors are banking on Draghi to announce quantitative easing at his press conference after the council meets, with economists in a Bloomberg survey estimating the package at €550 billion euros. What remains unclear is how far he’ll go to mollify critics who say unelected central-bank officials are transferring risk from weaker nations to stronger ones. The tension surfaced again yesterday at a conference in Dublin. Irish Finance Minister Michael Noonan said having national central banks buy government bonds would be “ineffective,” drawing a response from ECB Executive Board member Benoit Coeure.

“The discussion is how to design it in a way that works, in a way that makes sense,” Coeure said. “If this is a discussion about how best to pool sovereign risk in Europe, and how to make the pooling of sovereign risk take a step forward in an environment where the governments themselves have decided not to do it, then this is not the right discussion.” Klaas Knot, the Dutch central-bank governor, told Der Spiegel last week that “we have to avoid that decisions are taken through the back door of the ECB.”

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“Studies show that the business cycle was less volatile before the Federal Reserve was born. The presence of the Fed means that the implicit backing of the Fed allows excess leverage..”

Endgame for Central Bankers (Steen Jakobsen)

The SNB suddenly abandoning the CHF ceiling had wide consequences last week as we were all taken by surprise. The fact that it would and should happen eventually was not lost on the market, but the SNB was, as late as last weekend, talking tough and telling the market that the floor was an integral part of Swiss monetary policy. Then suddenly it was not. I fully understand the rationale for the move but, like most of the market, I remain extremely disappointed in the SNB’s communication and handling of the issue. But isn’t the bigger lesson or bigger question: Why is it that most people trust or bother to listen to central banks? Major centrals banks claim to be independent, but they are all ultimately under the control of politicians.

Many developed countries have tried to anchor an independent central bank to offset pressure from politicians and that’s well and good in principle until an economy or the effects of a monetary policy decision beginning spinning out of control. At zero bound for growth and for interest rates, politicians and central banks switch to survival mode, where rules are bent or even broken to fit an agenda of buying more time. Just look at the Eurozone crisis over the past eight years: every single criteria of the EU treaty has been violated, in spirit of not strictly according to the letter of the law, all for the overarching aim of “keeping the show on the road”. No, the conclusion has to be that are no independent central banks anywhere! There are some who pretend to be, but none operates in a political vacuum. That’s the reality of the moment.

I would not be surprised to find that the Swiss Government overruled the SNB last week and the interesting question for this week of course will be if the German government will overrule the Bundesbank on QE to save face for the Euro Zone? Likely…. The most intense focus for the last few years in central banking policy-making has been on “communication policy”, which boiled down to its essentials is merely an appeal to “believe us and act accordingly”, often without any real policy action. Look at the Federal Reserve’s forward guidance: They are constantly too optimistic on growth and inflation. Constantly. The joke being to get the proper GDP and inflation forecast you merely take the Fed’s own forecasts and deduct 100-150 bps from both growth and inflation targets and Voila! You have the best track record over time.

Studies show that the business cycle was less volatile before the Federal Reserve was born. The presence of the Fed means that the implicit backing of the Fed allows excess leverage (gearing), and this has resulted in bigger and bigger collapses in financial markets as each collapse triggers yet another central bank “put” that then enables the next bubble to inflate. And the trend of major crashes has been increasing in frequency: 1987 stock crash, 1992 ERM crisis, 1994 Mexico “Tequila crisis”, 1998 Asian crisis and Russian default, 2000 NASDAQ bubble, 2008 stock market crash, and now 2015 SNB, ECB QE, Russia and China, which will lead to what? I don’t know, but clearly the world of finance and the flow of money is increasing in velocity, meaning considerably more volatility.

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“Denmark’s three-decades-old peg is backed by the ECB, unlike the SNB’s former currency regime..” And that’s supposed to make us feel better?

Denmark Strikes Back at Speculators and Burnishes Peg Defenses (Bloomberg)

Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties. “Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible.” The comments followed yesterday’s surprise decision by the Danish central bank to cut its deposit rate by 15 basis points to minus 0.2%, matching a record low last seen during the darkest hours of Europe’s debt crisis in 2012. Like the Swiss, the Danes lowered rates after interventions in the market proved insufficient.

Denmark will probably deliver another rate cut on Jan. 22 as krone “appreciation pressure prevails” with the European Central Bank set to present details of its bond-purchase program, Danske Bank reiterated today. Danske, Denmark’s biggest bank, says it’s been inundated by calls from offshore investors and several hedge funds seeking advice on how to profit from the latest developments in currency markets. SEB, Scandinavia’s largest currency trader, says it’s fielded similar calls. Their response has been to tell investors that Denmark’s three-decades-old peg is backed by the ECB, unlike the SNB’s former currency regime. Denmark has “a long-lasting and politically firmly anchored fixed-currency policy,” Oestergaard said. “This situation should not be overly dramatized.”

To underline the point, the central bank yesterday sought to reassure investors that its monetary policy arsenal is big enough should speculators try to test its resolve. “We have the necessary tools” to defend the peg,Karsten Biltoft, head of communications at the central bank, said by phone. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.” Biltoft described as “somewhat off” any attempt to draw parallels between the Danish and Swiss currency pegs. “I don’t think you can make a comparison between the two cases,” he said. Yet the speculation is proving hard to put to rest. Defending Denmark’s euro peg “might be easier said than done in the current environment,” Ken Wattret at BNP Paribas, said. “The next test will of course be the upcoming ECB policy announcement on Thursday.” Given BNP’s estimate that the ECB will purchase €600 billion ($697 billion) in sovereign bonds, “further upward pressure on the DKK is likely,” he said.

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As if they have a choice.

Denmark Should Cut Loose From Euro (Bloomberg)

Europe’s currency war is picking up speed. On Monday, with the Danish krone appreciating against the euro, the Danish central bank sought to make the currency less attractive to safe-haven investors by cutting the deposit rate to -0.2% and the lending rate to 0.05%. After the Swiss National Bank abandoned its peg to the euro and cut interest rates, bankers and traders wondered which country would be the next to follow suit. No sooner had the franc zoomed upward than the Danish central bank prepared for an onslaught. Defending the krone’s peg to the euro could get a lot harder once the ECB begins its government bond-buying program, widely expected on Thursday. Yet maintaining the peg is an act of faith in Denmark.

The central bank should rethink its commitment. With a more flexible monetary policy, it could have done more to stimulate the economy since the global financial crisis, just as it could have prevented some of the overheating that took place in the years running up to the crisis. The krone has been pegged to the euro since 1999, and to the deutschemark before that. It’s allowed to fluctuate no more than 2.25% from 7.46038 to the euro. In practice, the central bank tries to keep the fluctuations within 0.5%. It also marches to the ECB’s monetary drum, including changing interest rates on the same day as ECB decisions, or in response to exceptional pressures on the euro-krone exchange rate. The peg was put in place to stabilize Danish monetary policy after a period of high inflation, which peaked at 12.3% in 1980.

It’s not clear that the peg is a good idea now. Unlike Sweden, which has a floating currency and until 2010 had a more sensible monetary policy, Denmark hasn’t fully recovered from the global economic crisis. Real gross domestic product per capita is still more than 7% below the pre-crisis peak. The desirability of the peg, however, is beyond debate in political and economic policy circles. When a prominent economist and former Danish government economic adviser was asked to compare the performance of the Danish economy with Sweden’s in December 2013, he was unable to name any area of economic policy where the Swedes did better. Monetary policy wasn’t mentioned at all; only structural reforms such as marginal tax rates and labor market policies were.

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Poland and especially Hungary have huge amounts of mortgages denominated in Swiss francs.

Swiss Upending Polish Mortgages Unnerves Bank Bondholders (Bloomberg)

Among the victims of last week’s shock surge in the Swiss franc are bond investors in Polish banks, which hold $35 billion in mortgages denominated in the currency. Yields on Eurobonds for lenders including Bank Polski and MBank jumped to five- and nine-month highs after the Swiss National Bank unexpectedly ditched its currency cap. The move sent the zloty tumbling against the franc on concern more Poles will fall behind on repaying franc-denominated home loans. JPMorgan said the nation’s banks may need to make additional provisions for non-performing mortgages in the currency, whose value is equivalent to 6.7% of gross domestic product.. While the zloty plunged 20% against the franc following the SNB action, Polish lenders have adequate capital to withstand a drop of more than twice that, the financial markets regulator said last week, citing results of October stress tests.

“This is clearly negative and increases the risks in the banking sector, which may or may not materialize,” Marta Jezewska-Wasilewska at Wood & Co., wrote in a research note Jan. 15. “Polish banks have managed to deal with the FX mortgage issue relatively well since 2008.” The yield on PKO’s 2019 euro-denominated bonds rose 40 basis points in the last three days to 1.56%, the highest since Aug. 22. The rate on similar-maturity MBank debt soared 83 basis points to 2.34% in the same period. The currency swing pushed banking stocks on the Warsaw Stock Exchange down by the most in more than three years, with Getin Noble Bank, owned by billionaire Leszek Czarnecki, leading declines after a 16% drop on Jan. 15. Getin’s Swiss-franc loans accounted for “slightly” above 20% of total loans at the end of last year, spokesman Wojciech Sury said in an e-mail last week. The bank sees no threat its liquidity levels will fall below the required minimum and is “ready for different scenarios,” he said.

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“They are not subject to an OPEC quota at the moment, and could flood the market”.

Iraq Back From The Brink With Largest Oil Output Since 1979 (CNBC)

In spite of still struggling to recover from the 2003 war and the continuing Islamic State (IS) insurgency, Iraq produced a record amount of oil last month, the country’s oil minister announced at the weekend. Unveiling production of 4 million barrels of crude per day in December, Adel Abdel Mehdi told reporters that the total was ” a historical figure, and the first time Iraq has achieved this.” Speaking at a joint press conference with his Turkish counterpart Taner Yildiz in Baghdad, the Iraqi minister added the production increase would “make up” for the recent slump in oil prices. Iraq, where lawmakers are now looking at a 2015 draft budget based on an average of $60 dollars a barrel, depends on crude exports to generate over 90% of government revenues. The barrel export count, if confirmed, also trumps estimates of 3.7 million b/d by the International Energy Agency (IEA) published last week.

The agency’s report also identified Iraq as the main driver behind a rise in OPEC supply in December by 80,000 b/d to 30.48 million b/d. Iraq has not pumped as much crude oil since 1979, when the previous record was set with 3.56 million b/d . The December total would make Iraq OPEC’s second largest producer, behind Saudi Arabia at around 7 million b/d and ahead of Iran, the United Arab Emirates and Kuwait which each produce 2.7 b/d. “It’s quite a significant increase, but in-line with all the investment that was done over the last 10 years,” Samir Kasmi at Dubai-based advisory firm CT&F, told CNBC. “They are not subject to an OPEC quota at the moment, and could flood the market”. Abdel Mehdi explained production in the region of Kirkuk, which was held by IS troops last year before being liberated in June, would reach 375,000 b/d for the first three months of 2015. Production would eventually rise to 600,000 b/d by April.

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10% of US production.

Price Collapse Hits Scavengers Who Scrape the Bottom of Big Oil (Bloomberg)

In the $1.6 trillion-a-year oil business, there are global titans like Exxon Mobil that wield more economic might than most of the nations on Earth, and scores of wildcatters scouring land and sea for the next treasure troves of crude. Then there are the strippers. For these canaries in the proverbial coal mine, the journey keeps going deeper and darker. Strippers are scavengers who make a living by resuscitating once-prolific oil fields to coax as little as a bathtub full of crude a day from each well. Collectively, the strippers operate almost half-a-million oil wells that produced more than 730,000 barrels a day in 2012, the most recent year for which figures were available.

That’s one of every 10 barrels produced in the U.S. – equivalent to the entire output of Qatar, or half the crude Shell, Europe’s largest energy company, pumps worldwide every day. With oil prices down 57% since June, these smallest of producers will be the first to succumb to the Great Oil Bust of 2015. “This is killing us,” said Todd Shulman, a University of Colorado-trained geologist who ran fracking crews in the Rocky Mountains before returning to Vandalia, Illinois, in 1984 to help run the family’s stripper well business. Stripper wells – an inglorious moniker for 2-inch-wide holes that produce trickles of crude with the aid of iconic pumping machines known as nodding donkeys – were a vital contributor to U.S. oil production long before the shale revolution.

Though a far cry from the booming shale gushers that have pushed American crude production to the highest in a generation, stripper wells are a defining image of the oil business, scattered throughout rural backwaters abandoned by the world’s oil titans decades ago. With the price of crude dipping so low, there’s no way Shulman will be able to drill a new well that regulators have already permitted. Nor is he even going to turn on a well finished last month that’s ready to start production. It would be foolhardy to harvest crude from wells that won’t pay for themselves, said Shulman, who scrapes remnants from old Texaco (CVX) and Shell fields 310 miles south of Chicago, in the heart of what had been a booming oil region in the 1930s. He’ll wait for prices to rebound.

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“The crude Keystone XL delivers will make no difference to US crude imports; it will simply displace crude imports from elsewhere.”

The Keystone XL Pipeline Makes No Difference (Energy Matters)

Lobbyists are mobilizing to advance it. Environmentalists are mobilizing to stop it. The newly-elected Republican House has already voted to approve it. So has the newly elected Republican Senate. Obama has threatened a veto. The media are having a field day. What’s so important about Keystone XL? Well nothing, really. Keystone XL is basically just another pipeline; a little longer and larger than most, but not unusually so, and it goes nowhere pipelines don’t already go. All it does is increase the capacity of the existing Keystone pipeline system, which has already transported over 550 million barrels of Canadian heavy crude from Alberta to the US. The crude Keystone XL delivers will make no difference to US crude imports; it will simply displace crude imports from elsewhere.

And if Keystone XL doesn’t get built the crude it would have carried will go somewhere else, meaning that no CO2 emissions would be saved by not building it. (Although building it probably would save CO2 emissions because much of the Canadian crude that now moves south on trucks and rail tankers would pass through Keystone instead.) So what’s all the fuss about? What’s happened, of course, is that Keystone XL has been blown totally out of proportion, to the point where it’s become a cause célèbre. But how it got to this point is something for the psychologists, sociologists and political scientists to argue about. Here we will confine ourselves to the facts.

First, the purpose of Keystone XL. Its purpose is simply to supply more Canadian heavy crude to US Gulf Coast refineries that are facing potential feedstock shortages because of declining heavy crude production from Mexico and Venezuela, their main historic suppliers. This is a perfectly reasonable business proposition. Canada is motivated to sell, the refineries are motivated to buy and both will profit from the transaction. (Scotland has the same motivation in wishing to sell its surplus wind power to England. The difference is that Canada can deliver a product the client wants when the client wants it.) Second, the Canada-US pipeline system. There’s a perception that Keystone XL will be the first pipeline to bring Canadian crude to the US, but as shown in Figure 1 a substantial network of oil pipelines linking the two countries already exists. (Keystone XL is the blue line running northwest of Steele City):

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“I call it a liquidity spiral. They’ll start burning right through cash.”

A Huge Credit Line Reset Looms Over Oil Drillers (Bloomberg)

Oil and gas companies have April circled on their calendars. That’s when their lenders will recalculate the value of properties that energy companies staked as loan collateral. With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend, crimping the ability of U.S. drillers to keep production growing. “This could start a downward spiral for some of these companies because liquidity will dry up,” said Thomas Watters, managing director of oil and gas research for Standard & Poors in New York. “I call it a liquidity spiral. They’ll start burning right through cash.” More than 20 U.S. exploration and production companies have used at least 60% of their credit lines, according to Bloomberg analyst Spencer Cutter. The energy industry is facing a cash squeeze after U.S. oil prices fell 60% since June.

Drillers have already cut spending to conserve cash. If credit lines are cut, the most indebted producers will be left scrambling to raise money elsewhere. New loans will be expensive – if they’re available at all. The credit lines, which typically are reset each spring and fall based on the value of borrowers’ petroleum reserves, operate like credit cards. To pay them off, companies have in the past sold off assets or issued bonds. The value of oil properties has declined at the same time that the borrowing environment for energy companies has gotten worse. At least one junk-rated company, Breitburn, has gotten an early jump on discussions with its lender. Breitburn’s credit limit was raised to $2.5 billion from $1.6 billion on Nov. 19 as a result of the acquisition of another energy company.

About three months ago, Los Angeles-based Breitburn attempted to sell $400 million of bonds to pay down its $2.5 billion credit line, but canceled the offering as oil falling below $90 a barrel roiled credit markets. The credit line is 88% drawn, according to regulatory filings. With the high-yield energy market still “challenged,” Breitburn is considering tapping the loan market, Jim Jackson, the oil producers’ chief financial officer, said in a phone interview. If its credit line is reduced to below what’s already been borrowed, “we would have six months to close that gap,” he said. “We’re being very pro-active.” Last week, S&P said it might downgrade Breitburn’s credit rating over concerns the company would face cash shortfalls if it couldn’t replace money from a reduced credit line.

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“There is a point in time where disinflation turns into deflation and then you start worrying about that potential car crash..”

Janjuah On 2015: Oil At $30; Bonds To Go Crazy (CNBC)

If you thought 2014 was volatile, hold on to your hats this year as the price of oil could hit $30 a barrel and the bond markets will outperform, according to Bob Janjuah, a closely-watched strategist from Nomura Securities. He told CNBC on Monday that there was little chance of Saudi Arabia changing its decision not to cut oil production, despite the 60% fall in prices since June 2014, and the cost of a barrel could head even lower. “Oil can go up in the short-term but I think actually that there’s some political motivations at play here and Saudi Arabia is at risk of losing its position as the marginal price-setter and I don’t think they want to lose that position,” Janjuah, co-head of cross-asset allocation strategy at Nomura, told CNBC Monday.

“I think the Saudis will potentially carry on (with their policy of not cutting production) and production will remain high but my head target is $30 – $35 as where we could get to. Where prices are now, I think a twenty dollar move is more difficult but I think that’s the risk and out there,” he told CNBC Europe’s “Squawk Box.” Janjuah believed that Saudi Arabia – the leading member of OPEC – would be content to maintain that pressure on the U.S. along with other major oil producers such as Russia. While some economies could benefit from lower oil prices, such as major importer Europe, Janjuah warned about the U.S. whose energy industry has grown thanks to its “fracking” of shale oil.

“If you look at the U.S. economy, the bulk of capital expenditure and jobs growth has been in and around the shale and energy-related sectors so if crude is down around the $30-$35 mark for a significant period of time I think you’re going to see a default cycle in the U.S. energy sector.” “I think disinflation is the key theme (this year) so you have to like bonds,” Janjuah said. “There is a point in time where disinflation turns into deflation and then you start worrying about that potential car crash where we start to worry about growth and earnings and how that hits the equity trade.”

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Translation: frack on!

U.S. Won’t Intervene in Oil Market (Bloomberg)

The U.S. won’t intervene in the oil market amid falling crude prices, according to Amos Hochstein, the U.S. State Department’s energy envoy. The U.S. will let “the market” decide what happens, Hochstein said in an interview at a conference in Abu Dhabi yesterday. Hochstein is special envoy and coordinator for international affairs at the State Department’s Bureau of Energy Resources. “When people ask the question ‘what will the U.S. do?,’ it’s really the market that’s going to have to decide what happens,” Hochstein said. “This is about a global market that is addressing the supply-demand curve.” Asked what the U.S. could do about falling prices and instability in oil markets, he said: “We do have mechanisms to work with our partners around the world if something extreme happens, but that’s not where I think we are and I think the markets so far can adjust themselves.”

Oil prices have dropped 53% in the past year as growing production from the U.S., Russia and OPEC overwhelmed demand. The International Energy said last week that the effects on U.S. production are so far “marginal.” “One of the most remarkable aspects of this recent period has been the resilience of the American energy market,” Hochstein said. U.S. oil production growth has swelled to its fastest pace in more than three decades, driven by output from shale deposits. Cheaper oil prices won’t stop development of alternative energy sources, he said. “We have really switched paradigms here where renewable energy really can continue to grow, even when there are low oil prices,” he said. “That’s true globally.”

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Not politically, it can’t.

Saudi Arabia Can Last Eight Years On Low Oil Prices (Guardian)

A former adviser to Saudi Arabia has said the country can withstand eight years or more of low oil prices as tensions over the price slump simmered between the world’s biggest oil exporter and Iran. Mohammad al-Sabban told the BBC that Saudi Arabia was concerned about the falling oil price but its cash reserves and planned budget cuts meant it could cope with a long period of depressed prices. “Saudi Arabia can sustain these low oil prices for at least eight years. First, we have huge financial reserves of about 3tn Saudi riyals (£527bn). Second, Saudi Arabia is embarking now on rationalising its expenditure, trying to take all the fat out of the budget. I think [Saudi Arabia] is worried but we [have to] wait for the full medicine that we have prescribed for ourself to take its course.”

Without cuts in spending on infrastructure, sports stadiums and new cities, Saudi Arabia can withstand low oil prices for at least four years, said Sabban, a former adviser to the Saudi minister for petroleum. He also suggested that lower oil prices could have long-term benefits for Saudi Arabia. Saudi Arabia has refused to cut production despite a more than 50% fall in the price of oil since last summer. “To shorten the cycle, you need to allow prices to go as low as possible to see those marginal producers move out of the market on the one hand, and also if there is any increase in demand that will be welcomed.” His comments were a further signal that Saudi Arabia was prepared to use its financial strength to ride out depressed oil prices now piling pressure on other producers, including Iran, which also faces western sanctions over its nuclear programme.

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Thank you Brussels for bringing back extremism.

Europe ‘Faces Political Earthquakes’ (BBC)

Political earthquakes could be in store for Europe in 2015, according to research by the Economist Intelligence Unit for the BBC’s Democracy Day. It says the rising appeal of populist parties could see some winning elections and mainstream parties forced into previously unthinkable alliances. Europe’s “crisis of democracy” is a gap between elites and voters, EIU says. There is “a gaping hole at the heart of European politics where big ideas should be”, it adds. Low turnouts at the polls and sharp falls in the membership of traditional parties are key factors in the phenomenon. The United Kingdom – going to the polls in May – is “on the cusp of a potentially prolonged period of political instability”, according to the Economist researchers.

They say there is a much higher than usual chance that the election will produce an unstable government – predicting that the populist UK Independence Party (UKIP) will take votes from both the Conservatives and Labour. The fragmentation of voters’ preferences combined with Britain’s first-past-the-post electoral system will, the EIU says, make it increasingly difficult to form the kind of single-party governments with a parliamentary majority that have been the norm. But the most immediate political challenge – and test of how far the growing populism translates into success at the polls – is in Greece. A snap general election takes place there on 25 January, triggered by parliament’s failure to choose a new president in December. Opinion polls suggest that the far left, populist Syriza could emerge as the strongest party. If it did and was able to form a government, the EIU says this would send shock waves through the European Union and act as a catalyst for political upheaval elsewhere.

“The election of a Syriza government would be highly destabilising, both domestically and regionally. It would almost certainly trigger a crisis in the relationship between Greece and its international creditors, as debt write-offs form one of the core planks of its policy platform,” the EIU says. “With similar anti-establishment parties gaining ground rapidly in a number of other countries scheduled to hold elections in 2015, the spill-over effects from a further period of Greek turmoil could be significant.” Other examples of European elections with potential for unpredictable results cited by EIU include polls in Denmark, Finland, Spain, France, Sweden, Germany and Ireland. “There is a common denominator in these countries: the rise of populist parties,” the EIU says, “Anti-establishment sentiment has surged across the eurozone (and the larger EU) and the risk of political disruption and potential crises is high.”

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“The audit revealed that between 2007 and 2008 the Federal Reserve loaned over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically-influential private companies.”

If The Fed Has Nothing To Hide, It Has Nothing To Fear (Ron Paul)

Since the creation of the Federal Reserve in 1913, the dollar has lost over 97% of its purchasing power, the US economy has been subjected to a series of painful Federal Reserve-created recessions and depressions, and government has grown to dangerous levels thanks to the Fed’s policy of monetizing the debt. Yet the Federal Reserve still operates under a congressionally-created shroud of secrecy. No wonder almost 75% of the American public supports legislation to audit the Federal Reserve. The new Senate leadership has pledged to finally hold a vote on the audit bill this year, but, despite overwhelming public support, passage of this legislation is by no means assured. The reason it may be difficult to pass this bill is that the 25% of Americans who oppose it represent some of the most powerful interests in American politics.

These interests are working behind the scenes to kill the bill or replace it with a meaningless “compromise.” This “compromise” may provide limited transparency, but it would still keep the American people from learning the full truth about the Fed’s conduct of monetary policy. Some opponents of the bill say an audit would somehow compromise the Fed’s independence. Those who make this claim cannot point to anything in the text of the bill giving Congress any new authority over the Fed’s conduct of monetary policy. More importantly, the idea that the Federal Reserve is somehow independent of political considerations is laughable. Economists often refer to the political business cycle, where the Fed adjusts its policies to help or hurt incumbent politicians.

Former Federal Reserve Chairman Arthur Burns exposed the truth behind the propaganda regarding Federal Reserve independence when he said, if the chairman didn’t do what the president wanted, the Federal Reserve “would lose its independence.” Perhaps the real reason the Fed opposes an audit can be found by looking at what has been revealed about the Fed’s operations in recent years. In 2010, as part of the Dodd-Frank bill, Congress authorized a one-time audit of the Federal Reserve’s activities during the financial crisis of 2008. The audit revealed that between 2007 and 2008 the Federal Reserve loaned over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically-influential private companies.

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”Next time around, the federals are going to have to confiscate stuff, break promises, take away things, and rough some people up.”

A Solemn Pause (Jim Kunstler)

Events are moving faster than brains now. Isn’t it marvelous that gasoline at the pump is a buck cheaper than it was a year ago? A lot of short-sighted idiots are celebrating, unaware that the low oil price is destroying the capacity to deliver future oil at any price. The shale oil wells in North Dakota and Texas, the Tar Sand operations of Alberta, and the deep-water rigs here and abroad just don’t pencil-out economically at $45-a-barrel. So the shale oil wells that are up-and-running will produce for a year and there will be no new ones drilled when they peter out — which is at least 50% the first year and all gone after four years.

Anyway, the financial structure of the shale play was suicidal from the get-go. You finance the drilling and fracking with high-yield “junk bonds,” that is, money borrowed from “investors.” You drill like mad and you produce a lot of oil, but even at $105-a-barrel you can’t make profit, meaning you can’t really pay back the investors who loaned you all that money, a lot of it obtained via Too Big To Fail bank carry-trades, levered-up on ”margin,” which allowed said investors to pretend they were risking more money than they had. And then all those levered-up investments — i.e. bets — get hedged in a ghostly underworld of unregulated derivatives contracts that pretend to act as insurance against bad bets with funny money, but in reality can never pay out because the money is not there (and never was.) And then come the margin calls. Uh Oh….

In short, enjoy the $2.50-a-gallon fill-ups while you can, grasshoppers, because when the current crop of fast-depleting shale oil wells dries up, that will be all she wrote. When all those bonds held up on their skyhook derivative hedges go south, there will be no more financing available for the entire shale oil project. No more high-yield bonds will be issued because the previous issues defaulted. Very few new wells (if any) will be drilled. American oil production will not return to its secondary highs (after the 1970 all-time high) of 2014-15. The wish of American energy independence will be steaming over the horizon on the garbage barge of broken promises. And all, that, of course, is only one part of the story, because there is the social and political fallout to follow.

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“Production can only be maintained through relentless drilling, and that relentless drilling has now stopped.”

Whiplash! (Dmitry Orlov)

Over the course of 2014 the prices the world pays for crude oil have tumbled from over $125 per barrel to around $45 per barrel now, and could easily drop further before heading much higher before collapsing again before spiking again. You get the idea. In the end, the wild whipsawing of the oil market, and the even wilder whipsawing of financial markets, currencies and the rolling bankruptcies of energy companies, then the entities that financed them, then national defaults of the countries that backed these entities, will in due course cause industrial economies to collapse. And without a functioning industrial economy crude oil would be reclassified as toxic waste. But that is still two or three decades off in the future.

In the meantime, the much lower prices of oil have priced most of the producers of unconventional oil out of the market. Recall that conventional oil (the cheap-to-produce kind that comes gushing out of vertical wells drilled not too deep down into dry ground) peaked in 2005 and has been declining ever since. The production of unconventional oil, including offshore drilling, tar sands, hydrofracturing to produce shale oil and other expensive techniques, was lavishly financed in order to make up for the shortfall. But at the moment most unconventional oil costs more to produce than it can be sold for. This means that entire countries, including Venezuela’s heavy oil (which requires upgrading before it will flow), offshore production in the Gulf of Mexico (Mexico and US), Norway and Nigeria, Canadian tar sands and, of course, shale oil in the US.

All of these producers are now burning money as well as much of the oil they produce, and if the low oil prices persist, will be forced to shut down. An additional problem is the very high depletion rate of “fracked” shale oil wells in the US. Currently, the shale oil producers are pumping flat out and setting new production records, but the drilling rate is collapsing fast. Shale oil wells deplete very fast: flow rates go down by half in just a few months, and are negligible after a couple of years. Production can only be maintained through relentless drilling, and that relentless drilling has now stopped. Thus, we have just a few months of glut left. After that, the whole shale oil revolution, which some bobbleheads thought would refashion the US into a new Saudi Arabia, will be over.

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New Zealand PM does hollow propaganda.

Why New Zealand Can Handle Europe, Oil Troubles (CNBC)

New Zealand’s exports may face headwinds from the decline in oil price and strengthening of its currency against the euro, but the country’s prime minister told CNBC that the “Kiwi economy” is set to carry on booming. The New Zealand dollar has appreciated just over 8% against the euro since in the last three months as expectations have risen that the European Central Bank (ECB) will announce a full-blown quantitative easing program when it meets this Thursday. The kiwi dollar, as it is known, strengthened further to a record high against the euro on Friday after the Swiss National Bank made a surprise policy move to abandon its minimum exchange rate against the euro. New Zealand Prime Minister John Key told CNBC that a stronger currency would not hinder the economy, one that is currently outperforming many developed nations.

“Obviously it’s had an impact as it’s pushed up the kiwi-euro rate and that makes it a little bit more difficult for our exporters but overall our economy is still very strong. We think we’ll grow 3.25% every year for the next three years, so about ten% over the next three years so we’re still confident we can get there, even with a higher exchange rate.” In December, Statistics New Zealand said the economy was growing faster than expected and had accelerated in the third quarter. Gross domestic product increased 1% in the third quarter from the previous quarter, according to the statistics body. Key said that the New Zealand economy was being helped by economic activity in the U.S. and he brushed aside concerns over a slowdown in growth in Asia. Europe was another matter, however.

“The U.S. is much stronger than people think now, we see a lot of activity out of the U.S. both in terms of tourists coming and the buying activity. Asia is still quite strident and there is some concern that China is going to fall over but I don’t think that’s going to happen. It’s still Europe that’s got to deal with its fundamental issues.” New Zealand’s third-quarter growth was driven by its primary industries, including the dairy industry and oil and gas exploration and extraction, which grew by 5.8%. After dairy, meat and wood, oil is the fourth-largest export for New Zealand and, as such, the steep decline in global oil prices could hit the country’s economy. Indeed, exploration companies like New Zealand Oil and Gas, TEG Oil and Key Petroleum are all looking to defer projects in the region.

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Thank ZIRP.

Bleak Future For Retirees As Savings Slashed (CNBC)

Millions of workers around the world could enter retirement with savings diminished by a fifth or more after getting into debt or financial difficulty, HSBC warned in a new report. According to the bank, the impact of the global economic downturn could be felt for decades by the vast number of people who raided their retirement funds and accumulated debt during the financial crisis. In a study of 16,000 people into global retirement trends, HSBC found that two in five workers stopped or reduced their savings for retirement during the downturn that began in 2007. The situation is particularly bad in the U.K. and Canada, the bank warned, where retirement savings have been nearly halved as a result of debts or financial constraints.

“Despite the fact that close to 70% of people feel like they will run out of money or not have enough to live on day-to-day in retirement, 40% of people today are either not saving for retirement or significantly reduced their savings for retirement,” Michael Schweitzer, head of sales and distribution for group wealth management at HSBC, told CNBC on Monday. “And that is going to cause a shortfall for millions of people – as much as a fifth when they do get to retirement.” Even with a recovery in the global economy, which the International Monetary Fund expects to grow 3.8% this year from 3.3% in 2014, debt accumulated during the financial crisis will continue to weigh on workers’ ability to save, HSBC said. According to the study, this gloom is being felt across the globe, with almost a quarter of working-age people anticipating living standards in retirement to be worse than they are today.

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Did anyone realize this?: “Wild honey bees can no longer be found in England or Wales ..”

Disease Threat To Wild Bees from Commercial Bees (BBC)

The trade in bees used for honey or to pollinate crops could have a devastating impact on wild bees and other insects, say scientists. New measures are needed to stop diseases carried by commercial bees spilling over into the wild, says a University of Exeter team. Evidence suggests bees bred in captivity can carry diseases that could be a risk to native species. Bees are used commercially to pollinate crops such as peppers and oilseed rape. Species of bees used for this purpose, or in commercial hives, are known to suffer from parasite infections and more than 20 viruses. Many of these can also infect wild bumble bees, wasps, ants and hoverflies.

The study, published in the Journal of Applied Ecology, reviewed data from existing studies to look at the potential for diseases to jump from commercial bees to insects in the wild. “Our study highlights the importance of preventing the release of diseased commercial pollinators into the wild,” said lead researcher Dr Lena Wilfert. “The diseases carried by commercial species affect a wide range of wild pollinators but their spread can be avoided by improved monitoring and management practices. “Commercial honey beekeepers have a responsibility to protect ecologically and economically important wild pollinator communities from disease.”

Several diseases of honey bee colonies are known. They include a parasite called the Varroa mite and a virus that leads to deformed wings, which has also been found in wild bumble bees. Vanessa Amaral-Rogers of the charity, Buglife, said the results of the study showed an urgent need for changes in how the government regulates the importation of bees. “Wild honey bees can no longer be found in England or Wales, thought to have been wiped out by disease,” she told BBC News. “Now these studies show how diseases can be transmitted between managed honey bees and commercial bumble bees, and could have potentially drastic impacts on the rest of our wild pollinators. “

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Jan 152015
 
 January 15, 2015  Posted by at 11:30 am Finance Tagged with: , , , , , , , , , ,  3 Responses »


Unknown Marin-Dell dairy truck, San Francisco Mar 1 1945

US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)
US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)
The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)
Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)
What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)
Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)
Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)
US Oil Output Advances To Record Even as Prices Decline (Bloomberg)
Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)
Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)
Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)
Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)
Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)
Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)
ECB Stimulus Already Priced Into Market (CNBC)
Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)
Germany Gets Walloped By Its Own Austerity (Bloomberg)
Weak Capex Spending Spells Trouble For Japan (CNBC)
Market Madness Started With End Of Fed’s QE (CNBC)
Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)
Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)
China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)
Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)
Specter Of Fascist Past Haunts European Nationalism (Reuters)
Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

What on earth happened to holiday sales?

US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)

The optimism surrounding the outlook for U.S. consumers was taken down a notch as retail sales slumped in December by the most in almost a year, prompting some economists to lower spending and growth forecasts. The 0.9% decline in purchases followed a 0.4% advance in November that was smaller than previously estimated, Commerce Department figures showed today in Washington. Last month’s decrease extended beyond any single group as receipts fell in nine of 13 major retail categories. While disappointing, the drop followed large-enough gains at the start of the quarter that signaled consumer spending accelerated from the previous three months as the job market strengthened and gasoline prices plunged. Continued improvement in hiring that sparks more wage growth will be needed to ensure customers at retailers such as Family Dollar Stores also thrive.

“Maybe the optimism a month ago got a little too heated,” said Guy Berger, U.S. economist at RBS. “It’s a weak number but it follows some really strong ones and I don’t think it changes my general feeling on how the economy and consumers are doing.” Treasury yields and stocks fell as a deepening commodities rout and the drop in sales spurred concern global growth is slowing. The Standard & Poor’s 500 Index retreated 0.6% to 2,011.27 at the close in New York. The 30-year Treasury bond yielded 2.47% after declining earlier to a record-low 2.39%. Electronics merchants, clothing outlets, department stores and auto dealers were among those posting sales declines in December, today’s report showed. Cheaper fuel helped push receipts at gasoline stations down by the most in six years. T

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But but but indeed.

US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)

But but but… US retail advanced sales dropped a stunning 0.9% MoM (massively missing expectations of a 0.1% drop). The last time we saw a bigger monthly drop was June 2012. Want to blame lower gas prices – think again… Retail Sales ex Autos and Gas also fell 0.3% (missing an exuberantly hopeful expectation of +0.5% MoM) and the all-important ‘Control Group’ saw sales fall 0.4% (missing expectations of a 0.4% surge). Boom goes the narrative. Advance Retail Sales massively missed For Dec…

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“.. no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds.”

The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)

Today’s 0.9% decline in December retail sales apparently came as a shock to bubblevision’s talking heads. After all, we have had this giant “oil tax cut”, and, besides, the US economy has “decoupled” from the stormy waters abroad and is finally on its way to “escape velocity”. The Wall Street touts and Keynesian economic doctors have been saying that for months now – while averring that all the Fed’s massive money printing is finally beginning to bear fruit. So today’s retail report is a real stumpe – –even if you embrace Wall Street’s sudden skepticism about government economic reports and ignore the purported “noise” in the seasonally maladjusted numbers for December. All right then. Forget the December monthly numbers. Why not look at the unadjusted numbers in the full year retail spending report for 2014 compared to the prior year.

Recall that the swoon from last winter’s polar vortex overlapped both years, and was supposed to be a temporary effect anyway – a mere shift of consumer spending to a few months down the road when spring arrived on schedule. On an all-in basis, total retail sales in 2014 rose by $210 billion or a respectable 4.0%. But 58% of that gain was attributable to two categories – auto sales and bars&restaurants – which accounted for only 28% of retail sales in 2013. And therein lies a telling tale. New and used motor vehicle sale alone jumped by $86 billion in CY2014 or nearly 9%. Then again, during the most recent 12 months auto loans outstanding soared by $89 billion. Roughly speaking, therefore, consumers borrowed every dime they spent on auto purchases and took home a few billion extra in spare change.

The point here is that no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds. Yet that has been the essence of the retail sales rebound since the Great Recession officially ended in June 2009. Auto sales, which have been heavily financed by borrowing, are up by about 70%; the balance of non-auto retail sales, where consumer credit outstanding is still below the pre-crisis peak, has gained only 22%. Stated differently, the only credit channel of monetary policy transmission which is still working is auto credit. Yet as indicated earlier this week, that actually amounts to a proverbial “accident” waiting to happen. On the margin, the boom in auto loans, which are now nearing $1 trillion in outstandings, is on its last leg. The latest surge of growth has been in “subprime” credit based on the foolish assumption that vehicle prices never come down; and that the junk car loan boom led by fly-by-night lenders is nothing to worry about since loans are “collateralized”.

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Wow!

Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)

Switzerland’s franc soared by almost 30% in value against the euro on Thursday after the Swiss National Bank abandoned its three-year old cap at 1.20 francs per euro. In a chaotic few minutes on markets after the SNB’s announcement, the franc broke past parity against the euro to trade at 0.8052 francs per euro before trimming those gains to stand at 88.00 francs. It also gained 25% against the dollar to trade at 74 francs per dollar.

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Huh? ” ..looking at economic data, “we’re certainly not seeing anything that’s unnerving us.”

What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)

The U.S. consumer, that dynamo of the global economy, just took a step back. Relax. It’s not that bad, economists say. News Wednesday that U.S. retail sales unexpectedly declined in December reverberated through financial markets, but few economists read the report as a sign of trouble for the nation’s economy. In fact, many economists say the U.S. economy is doing just fine. So why did the markets react the way they did? The answer, in part, is that the report added to a wall of worry confronting investors. Topping the 2015 angst-list are the plunge in oil and other commodities, as well as slowdowns in China and Europe.

“It feels like a global recession when you look at the markets,” said David Hensley, director of global economics for JPMorgan. But looking at economic data, “we’re certainly not seeing anything that’s unnerving us.” For the moment, the 0.9% decline in December retail sales reported by the Commerce Department has pushed back market expectations for when the Federal Reserve will start raising interest rates. It also has bond investors betting that inflation will stay low. Forecasts change all the time. But before anyone panics over one economic number, here are four reasons to stay optimistic about the U.S. economy, which is still in the driver’s seat of global growth.

• December sales figures aside, U.S. consumers aren’t running scared. Yes, last month’s decline was the biggest in a year. But consumer spending probably rose at an annual rate of more than 4% during the fourth quarter as a whole, according to Ted Wieseman at Morgan Stanley. The first quarter of this year is looking just as good, Wieseman wrote in a note today to clients.

• The U.S. jobs market is perking up. Less than a week ago, investors were cheering news of another big rise in U.S. payrolls. In all, the economy added about 3 million jobs last year. “The U.S. is doing great relative to the rest of the developed world,” said Jim O’Sullivan at High Frequency Economics.

• The plunge in oil and other commodities is mostly good news for consumers. Cheaper oil means cheaper fuel. And most economists say that’s good for global growth. The plunge in oil, for example, largely reflects an increase in supply, from shale and the like, rather than a decrease in demand. U.S. production of crude oil rose to 9.19 million barrels a day last week, the highest in Energy Information Administration weekly estimates going back to 1983.

• Bond yields are hitting new lows, but that doesn’t necessarily mean the entire world is about to sink into a deflationary spiral in which prices, wages and output fall in tandem. In fact, many economists predict wages in the U.S. will finally start rising this year. “It’s just a matter of time before wage growth picks up,” said Mohamed El-Erian.

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“The Street’s estimates are based on a price of roughly $75 a barrel for oil ..”

Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)

Most Wall Street analysts are basing their 2015 earnings estimates for oil companies on a questionable number: the price of oil itself. Exxon Mobil, which has, by far, the largest market value of any oil producer, illustrates this point perfectly. The consensus among sell-side analysts polled by FactSet is for the company to earn $5.18 a share this year, down 40% from an estimated $7.27 in 2014. The expected decline in earnings springs from the crash in oil prices amid slowing demand, increased U.S. supply and OPEC’s strategy of defending its market share by refusing to cut production. But Oppenheimer analyst Fadel Gheit, who’s based in New York, has diverged wildly from his peers, predicting a 2015 EPS estimate of only $2.65 for Exxon Mobil.

“The Street’s estimates are based on a price of roughly $75 a barrel for oil,” which is where the analysts think oil will end up after recovering from its drop. Oppenheimer’s estimates are updated every Friday, based on current oil prices, not on where the firm’s analysts think the price may eventually settle. Gheit’s estimates from Friday were based on prices of $51.68 a barrel for West Texas crude and $55.20 for Brent crude. Based on the consensus 2015 estimate and Tuesday’s closing stock price of $90, Exxon Mobil would trade for 17.4 times this year’s earnings. That’s not an outrageously high valuation. However, based on Gheit’s estimate, which in turn is based on what’s actually going on in the oil market, the stock would trade for about twice as much: 34 times earnings.

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What do they expect?

Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)

Oil resumed its decline after the biggest gain since June 2012 as U.S. crude production increased, bolstering speculation a global supply glut that spurred last year’s price collapse may persist. Futures dropped as much as 1.3% in New York. U.S. output surged to 9.19 million barrels a day last week, the fastest pace in weekly records dating back to January 1983, the Energy Information Administration reported yesterday. Crude may fall below a six-month forecast of $39 a barrel and rallies could be thwarted by the speed at which lost shale production can recover, according to Goldman Sachs. Oil slumped almost 50% last year, the most since the 2008 financial crisis, as OPEC resisted cutting output even amid the U.S. shale boom, exacerbating a surplus estimated by Kuwait at 1.8 million barrels a day.

Prices rose yesterday as a relative strength index rebounded after more than two weeks below 30, a level that typically signals the market is oversold. “You tend to arrive at points every now and then in major trends like this where you just see a little bit of short covering and profit taking,” Ric Spooner at CMC Markets in Sydney, said. “Supply is still the general theme.” Oil is leading this week’s slide in commodities after a decade-long bull market led companies to boost production and a stronger dollar diminished their allure to investors. The Bloomberg Commodity Index of 22 energy, agriculture and metal products decreased to the lowest level since November 2002 on Jan. 13, extending a 17% loss last year.

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“.. output rose in November as the number of new wells coming online fell by 73%.”

US Oil Output Advances To Record Even as Prices Decline (Bloomberg)

Drillers that unlocked the shale oil boom in the U.S. are finding it hard to shut off the nozzle. U.S. crude production rose even as prices slumped to the lowest in more than five years and the number of rigs targeting oil decreased. In North Dakota’s prolific Bakken shale formation, output rose in November as the number of new wells coming online fell by 73%. The increases illustrate how improvements in horizontal drilling and hydraulic fracturing technology may prop up U.S. crude production even as companies cut spending, idle rigs and lay off thousands of workers with oil prices down more than 50% since June. “We have an oversupply of crude,” Michael Hiley, head of energy OTC at LPS Partners said yesterday.

“Production keeps going up. There is not a great correlation between the rig count and production because drilling has gotten more efficient over the last several years.” Output climbed to 9.19 million barrels a day last week, the most in Energy Information Administration weekly estimates going back to 1983. Strong production helped push crude inventories to a seasonal record, EIA data showed. Crude has slumped 9% in 2015 after declining 46% in 2014 as shale oil lifted U.S. supply and OPEC maintained production. Last week, U.S. oil rigs declined by the most since 1991. Producers including Continental and ConocoPhillips say they will cut spending.

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“.. in the coming few weeks,”

Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)

Iraq will double exports within weeks from its northern Kirkuk oil fields and continue boosting output further south amid a global market glut that’s pushed prices to their lowest level in more than five and a half years. Crude shipments will rise to 300,000 barrels a day from the Kirkuk oil hub, where authorities are also upgrading pipelines between fields, Fouad Hussein, at Kirkuk provincial council’s oil and gas committee, said. “There is a need to install a new pipeline network” to increase exports from the area, Hussein said. Kirkuk, which currently exports about 150,000 barrels a day, will boost shipments to 250,000 barrels a day and then to 300,000 “in the coming few weeks,” he said. Iraq, holder of the world’s fifth-largest crude reserves, is rebuilding its energy industry after decades of wars and economic sanctions.

The country exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesman Asim Jihad said Jan. 2. The exports, pumped mostly from fields in southern Iraq, included 5.579 million barrels from Kirkuk in that month, he said. [..] State-owned Missan Oil plans to boost its production to 1 million barrels a day in 2017 from an average output of 257,000 barrels a day in 2014, according to Director-General Adnan Sajet. Output exceeded 93 million barrels in 2014, up 10 million barrels from the previous year, he said yesterday. Iraq’s government also awarded a contract to an unspecified international company to more than double the capacity of the southern Basra oil refinery to 300,000 barrels a day, according to an e-mailed statement from the office of Deputy Prime Minister Rowsch Nuri Shaways. The refinery can currently process about 140,000 barrels a day.

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“U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion ..” “Premier Oil also announced an estimated $300-million impairment charge for the second half of this year ..”

Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)

The ongoing rout in oil markets is putting high-profile industry names on the back foot, with Shell announcing major changes to operations this week – and BP expected to follow suit. BP is expected to announce significant job cuts across the 20 oil fields in owns in the North Sea – just off the coast of the U.K. – on Thursday, according to media reports. It currently employs 4,000 workers in the area. Meanwhile, Anglo–Dutch multinational Royal Dutch Shell announced that it had decided to shelve the construction of a new petrochemicals complex in Qatar, was due to be a tie-up with the country’s state-owned oil firm.

In the exploration sector – the first to be hit by falling oil prices – U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion, and warned there had been “major steps taken to strengthen the business to adapt to current market conditions.” Rival exploration firm Premier Oil also announced an estimated $300-million impairment charge for the second half of this year on Wednesday, with delays and cost-cutting plans expected in the development of some of its new oil fields. Weak global demand and booming U.S. shale oil production are seen as two key reasons behind the price plunge, as well as OPEC’s reluctance to cut its output. Both WTI and Brent crude prices have crashed by around 60% since mid-June last year and oil stocks have been crushed, underperforming the wider benchmarks.

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“As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago ..”

Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)

The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices. By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel. “For the oil and gas industry, it’s scary,” Osakwe said in an interview after he was laid off last month from a unit of Halliburton, which he joined in September 2013. “I was blind to the ups and downs associated with the industry.”

It’s hard to blame him. The oil industry has been on a tear for most of the past decade, with just a brief timeout for the financial crisis. As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago, according to data kept by Rigzone, an employment company servicing the energy industry. Stunned by the sudden plunge in the price of oil, energy companies have increasingly resorted to layoffs to cut costs since Christmas, shocking a new generation of workers, like Osakwe, unfamiliar with the industry’s historic boom and bust cycles. Workers who entered the holiday season confident they had secure employment in one of the country’s safest havens now find themselves in shrinking workplaces with dimming prospects. [..]

There’s no firm number yet on how many oil industry workers are losing their jobs, or how many more cuts might be coming. Halliburton said last month it was laying off 1,000 staff in the Eastern Hemisphere alone as it adapted to a shrinking business. Suncor, a Canadian oil company, said this week it will cut 1,000 jobs in 2015, a day after Shell said it would cut 300 in the region. Other companies have announced layoffs, but many are making the cuts without public fanfare. The effects are being felt beyond the oil companies as cutbacks trickle down to suppliers and other companies that thrived along with $100 oil. The biggest drilling states – Texas, North Dakota, Louisiana, Oklahoma, Colorado – are expected to feel the most pain. The Dallas Federal Reserve estimates 140,000 jobs directly and indirectly tied to energy will be lost in Texas in 2015 because of low oil prices.

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“North Sea oilfields could be shut down if the oil price fell by just a few more dollars ..”

Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)

The potential impact of the oil price slump on Scotland was underlined as a leading energy expert warned on Wednesday that North Sea oilfields could be shut down if the oil price fell by just a few more dollars. The rising sense of crisis about the plummeting price – which has fallen 60% in the last six months – prompted the Scottish government to promise an emergency taskforce to try to preserve jobs in the offshore energy sector. Meanwhile, Mark Carney, the governor of the Bank of England warned that the Scottish economy was heading for a “negative shock”. The oil industry consultancy Wood Mackenzie said that at the current price for Brent blend, of $46 a barrel, some UK production was already failing to break even, and further falls could endanger output.

Robert Plummer, a research analyst with the firm, said that at $50 a barrel oil production was costing more than its value in 17 countries, including the US and UK. Plummer told Scottish Energy News: “Once the oil price reaches these levels producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply.” Concern about cutbacks was heightened Wednesday when Shell announced it was scrapping a $6.4bn (£4.2bn) energy project in the Middle East because it was no longer commercial, with oil prices falling to six-year lows. Plummer said that if oil prices fell to $40, a small but significant part of global supply would become “cash negative”, although some operators would choose to keep producing oil at a loss rather than stop production.

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So many projects will be shelved.

Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)

Qatar Petroleum and Royal Dutch Shell called off plans to build a $6.5 billion petrochemical plant in the emirate, saying the project is no longer commercially feasible amid the upheaval in global energy markets. The companies formed a partnership for the al-Karaana project in 2011 and planned to operate it as a joint venture, with state-run QP owning 80% and Shell the remaining 20%. They decided not to proceed after evaluating quotations from bidders for engineering and construction work, the companies said yesterday in a joint statement. The expected capital cost of the petrochemical complex planned in Ras Laffan industrial city “has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” they said.

Al-Karaana is the second petrochemical project in Qatar to be canceled in recent months due to unfavorable economics. Industries Qatar, the state-controlled petrochemical and steel producer, halted plans to build a $6 billion plant in September. Qatar, an OPEC member and the world’s biggest exporter of liquefied natural gas, is seeking like other energy producers in the Persian Gulf to diversify its economy away from oil and gas exports and building factories to make petrochemicals, aluminum and steel. “The region is beginning to reduce its capital expenditure for petrochemical and hydrocarbon expansion, and that is expected given that oil prices have plunged,” John Sfakianakis, Middle East director at Ashmore Group Plc, said in a phone interview.

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“This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.”

Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)

The European Court of Justice has declared legal supremacy over the sovereign state of Germany, and therefore of Britain, France, Denmark and Poland as well. The ECJ’s advocate-general has not only brushed aside the careful findings of the German constitutional court on a matter of highest importance, he has gone so far as to claim that Germany is obliged to submit to the final decision. “We cannot possibly accept this and they know it,” said one German jurist close to the case. The matter at hand is whether the European Central Bank broke the law with its back-stop plan for Italian and Spanish debt (OMT) in 2012. The teleological ECJ – always eager to further the cause of EU integration – did come up with the politically-correct answer as expected. The ECB is in the clear.

The opinion is a green light for quantitative easing next week, legally never in doubt. The European Court did defer to the Verfassungsgericht in Karlsruhe on a few points. The ECB must not get mixed up with the EU bail-out fund (ESM) or take part in Troika rescue operations. But these details are not the deeper import of the case. The opinion is a vaulting assertion of EU primacy. If the Karlsruhe accepts this, the implication is that Germany will no longer be a fully self-governing sovereign state. The advocate-general knows he is risking a showdown but views this fight as unavoidable. “It seems to me an all but impossible task to preserve this Union, as we know it today, if it is to be made subject to an absolute reservation, ill-defined and virtually at the discretion of each of the Member States,” he said.

In this he is right. “This Union” – meaning the Union to which EU integrationists aspire – is currently blocked by the German court, the last safeguard of our nation states against encroachment. This is why the battle is historic.”His opinion is a direct affront to the German court. It asserts that the EU court has the final say in defining and creating the EU’s own powers, without any national check,” said Gunnar Beck, a German legal theorist at the University of London. “This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.” Germany’s judges have never accepted the ECJ’s outlandish claims to primacy.

Their ruling on the Maastricht Treaty in 1993 warned in thunderous terms that the court reserves the right to strike down any EU law that breaches the German Grundgesetz or Basic Law. They went further in their verdict on the Lisbon Treaty in July 2009, shooting down imperial conceits. The EU is merely a treaty club. The historic states are the “masters of the Treaties” and not the other way round. They set limits to EU integration. Whole areas of policy “must forever remain German”. If the drift of EU affairs erodes German democracy – including the Bundestag’s fiscal sovereignty – the country must “refuse further participation in the European Union”.

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“In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

ECB Stimulus Already Priced Into Market (CNBC)

The markets have already priced in the quantitative easing that the European Central Bank is expected to do next week and he doesn’t think it will be very powerful, David Malpass, president of Encima Global, told CNBC Wednesday. Therefore, he believes the markets are entering a phase of global rebalancing. “People will get tired of just being in the U.S. and will take a look at some of the emerging markets, oil, the euro and so on,” Malpass said in an interview with “Closing Bell.” David Hale, chairman of David Hale Global Economics, agrees the market has been discounting the anticipated QE for several weeks.

“Bond yields in Europe are at record low levels. Leaving aside the last few days, stock markets have been resilient. So I do think the expectation of this happening is now broadly in the market because of both comments by [ECB President Mario] Draghi and other members of the monetary policy council.” The European Central Bank meets next Thursday, and Draghi has said the bank is ready to start full-blown quantitative easing. Hale expects a “decent” amount of QE but said he doesn’t think it will work well enough to be stimulative. “The bond yields are already low, and remember the ECB is going to finance all those bond purchases with bank financing,” he said. “In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

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Sort of like Switzerland. Only, the koruna will plummet, not rise.

Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)

Currency traders are taking aim at the Czech Republic amid speculation that policy makers will have little choice but to weaken the koruna as it seeks to avert deflation. A measure of volatility jumped this month by the most among 31 major peers as the koruna fell to a six-year low of 28.5 per euro. The exchange rate is so far away from the 27-per-euro cap imposed by the central bank more than a year ago when inflation was the bigger threat that Goldman Sachs says it’s now “odds on” that the ceiling gets adjusted to 30 per euro. “I expect the koruna to tumble much further,” Bernd Berg, director of emerging-market strategy at SocGen, said. “The economy is on the brink of deflation. This has increased the likelihood of a dovish monetary-policy reaction.”

While neighboring Poland and Hungary have room to cut interest rates to curb deflation, the Czech Republic’s options are limited because its borrowing costs are already close to zero at 0.05%. Central-bank Governor Miroslav Singer entered the debate yesterday, seeking to play down the prospect of a lower currency limit by saying it may only become necessary if there were a “long-term increase in deflation pressures.” Singer’s comments in a blog on the Czech National Bank’s website helped the koruna rally late in the trading day, though it’s still 1.5% lower against the euro this year, the biggest loss among 31 major currencies after Russia’s ruble.

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“.. their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.”

Germany Gets Walloped By Its Own Austerity (Bloomberg)

The euro region is suffering from austerity fatigue, exemplified by polls showing Greece on the verge of dumping its government for one with less enthusiasm for spending cuts. Germany has been the principal architect of fiscal rectitude and the main opponent to any relaxation of deficit rules. What’s happening in the heartland of German industry, however, suggests it’s not just Germany’s neighbors who are threatened by its economic intransigence. The backbone of the German economy is formed by about 3.7 million small- and medium-sized enterprises, defined as those with annual sales no greater than 50 million euros ($60 million) and known as the Mittelstand. It turns out their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.

That’s the unavoidable conclusion of a report published by the German Savings Banks Association yesterday. The association polled more than 330 of the country’s 416 savings banks in October, and examined more than a quarter of a million SME balance sheets. For German companies that did invest last year, only 19.7% cited “expansion” as their motivation, down from 27.5% in 2013 and the lowest outcome since 2010. More than half of the companies instead were replacing old machinery. Investment itself remains stagnant, stuck at about 340 billion euros or 11.7% of gross domestic product. For small and medium-sized enterprises, this weakness of investment was not due to a lack of external financing or insufficient equity. The continuing economic difficulties experienced by many partner countries in the Monetary Union as well as geopolitical crises have reinforced the wait-and-see attitude of many enterprises.

Only 16% of the business managers at the banks said their customers’ businesses got better in 2014, less than half the number who said a year earlier that they were seeing improvements. Some 18% said things had gotten worse, versus just 4.6% in 2013. Companies in the west of Germany, which are typically the most dependent on exports, were worse hit than those in the eastern federal states, the association said. In response, companies are retrenching. Some 46% of the bank respondents said they provided less investment financing for their customers last year, with just 16% upping their credit allocations. By contrast, more than 64% of companies expanded their equity bases, adding to 59% in both 2012 and 2013.

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What goes for Germany goes for Japan: “Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan ..”

Weak Capex Spending Spells Trouble For Japan (CNBC)

The majority of Japanese companies appear unwilling to spend, latest government data showed on Wednesday, adding to doubts over the economy’s ability to recover amid slowing growth across the world, particularly in China. Core machinery orders, a leading indicator of capex spending, grew 1.3% on-month in November, a reversal from October’s 6.4% decline, but well below expectations for a 5.0% rise in a Reuters poll. Year-on-year, machinery orders dropped 14.6%, below the Reuters poll estimate of a 5.8% decline. At the same time, the Cabinet Office cut its assessment of machinery orders, citing signs that the economic recovery is stalling, Reuters reported.

“Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan,” said Taro Saito, director of economic research at NLI Research Institute. “The trend to hoard cash rather than invest is not good for the wider Japanese economy.” Still, he reckons capital spending is on a modest recovery trend now that the second consumption tax hike initially scheduled for October 2015 was shelved until April 2017. The first hike from 5% to 8% in April 2014 was too brutal, he said. Japan’s economy contracted in the two quarters following April’s tax hike, tipping the country into a technical recession.

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We are just leaving the madness. “The fuel for the fire over the last several years has been stock repurchases, and that has been fueled for the most part by the zero interest rate environment.”

Market Madness Started With End Of Fed’s QE (CNBC)

For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington. Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring. Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding. So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring. “Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group.

“It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended.” Indeed, the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October. That month marked a momentary collapse in bond yields on Oct. 15, a day that also saw the Dow Jones industrial average plunge some 460 points at one juncture before slicing its losses. The day, and the general tenor of markets as the Fed ended QE amid a global Ebola and economic growth scare, helped make October the most volatile month of 2014.

In second place for monthly volatility was December, according to a Tabb Group analysis, as investors pondered the meaning of “patient” in a Fed statement on when it planned to raise rates and waited for a Santa Claus rally that failed to materialize. January has proven to be an even bumpier month as investors evaluate an oil plunge that sent a gallon of gasoline below $2 in some locations but has raised question about longer-term effects on corporate bottom lines and business investment. Then came Wednesday’s disappointing retail sales numbers, all of which raised concerns about whether Wall Street is capable of negotiating its way through rough times with only zero-bound short-term interest rates as a backstop. “The assumption that low energy prices were unambiguously good was called into question with December retail sales,” said Art Hogan at Wunderlich Securities. “I think it’s all connected, but I’d be hard-pressed to tie it just to monetary policy.”

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Threat to the EU.

Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)

Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey, a surprise move that the European Union’s energy chief said would hurt its reputation as a supplier. The decision makes no economic sense, Maros Sefcovic, the European Commission’s vice president for energy union, told reporters today after talks with Russian government officials and the head of gas exporter, Gazprom, in Moscow. Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions. About 40% of Russia’s gas exports to Europe and Turkey travel through Ukraine’s Soviet-era network.

Russia, which supplies about 30% of Europe’s gas, dropped a planned link through Bulgaria bypassing Ukraine amid EU opposition last year. Russia’s relations with the EU have reached a post-Cold War low over President Vladimir Putin’s support for separatists in Ukraine. Sefcovic said he was “very surprised” by Miller’s comment, adding that relying on a Turkish route, without Ukraine, won’t fit with the EU’s gas system. Gazprom plans to deliver the fuel to Turkey’s border with Greece and “it’s up to the EU to decide what to do” with it further, according to Sefcovic. “We don’t work like this,” he said. “The trading system and trading habits – how we do it today – are different.”

Sefcovic said he arrived in the Russian capital to discuss supplies to south-eastern EU countries after Putin scrapped the proposed $45 billion South Stream pipeline. The region, even if Turkey is included, doesn’t need the volumes Gazprom is planning for a new link, he said. Ukraine makes sense as a transit country given its location in Europe and the “very clear specified places of deliveries” in Gazprom’s current long-term contracts with EU customers, Sefcovic said. “I believe we can find a better solution,” Sefcovic said.

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They’ll be fine.

Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)

Russia will unseal its $88 billion Reserve Fund and use it to acquire rubles, the government’s latest effort to stem the country’s worst currency crisis in almost 17 years and limit its effects on the ailing economy. “Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy.” Russian officials are running out of options to stem the ruble’s plunge as oil prices below $50 a barrel and sanctions imposed over the conflict in Ukraine push the country to the brink of recession. Policy makers have already raised interest rates by the most since 1998 and introduced a 1 trillion-ruble ($15 billion) bank recapitalization plan. The risk for policy makers is that using the reserves to fight the ruble’s slide will worsen its standing with investors.

Economy Minister Alexei Ulyukayev said today there’s a “fairly high” risk that the country’s credit rating will be cut below investment grade for the the first time in a decade. “This should be viewed just as the continuation of the desire to present a united front in dealing with events in the foreign-currency market,” Ivan Tchakarov, chief economist at Citigroup in Moscow, said. Russia may convert the equivalent of as much as 500 billion rubles from one of the government’s two sovereign wealth funds to support the national currency, Siluanov said, calling the ruble “undervalued.” The Finance Ministry last month started selling foreign currency remaining on the Treasury’s accounts. The entire 500 billion rubles or part of the amount will be converted in January-February through the central bank, according to Deputy Finance Minister Alexey Moiseev. The Bank of Russia will determine the timing and method of the operation.

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“Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles”

China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)

China’s shadow banking industry staged a comeback in December as equity investors and local governments contributed to a surge in credit, underscoring challenges for a central bank trying to revive growth without exacerbating risks. Aggregate financing was 1.69 trillion yuan ($273 billion), the People’s Bank of China said in Beijing today, topping the 1.2 trillion yuan median estimate in a Bloomberg survey. While new yuan loans missed economists’ forecasts, shadow lending rose to the highest in monthly records that began in 2012. With economic growth headed below 7%, the central bank cut interest rates for the first time in two years in November. While manufacturing and factory-gate deflation have worsened, the main stock market index surged about 30% since the rate reduction was announced on Nov. 21.

“This highlights the dilemma for the PBOC: the real economy is still weak, and loan demand is weak, but speculative activity is rampant in the stock market, and local governments need funding,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “I believe the PBOC will further postpone rate and RRR cuts, and instead will resort to targeted measures of injecting liquidity.” New yuan loans, which measure new lending minus loans repaid, were 697.3 billion yuan, missing the median estimate of 880 billion yuan. The M2 gauge of money supply rose 12.2% from a year earlier, compared with the median estimate of 12.5%. December’s entrusted loans increased to about 458 billion yuan, according to PBOC data compiled by Bloomberg — the most on record for the company-to-company credits that are brokered by banks.

Trust loans increased to 210 billion yuan, the most since March 2013. The contrast between new yuan loans and aggregate financing “shows that financial liquidity is not sufficient to support economic activity,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong. “IPOs have been active, and shadow banking is reviving.” The outstanding balance of margin-trading loans on the Shanghai and Shenzhen stock exchanges rose to a then-record 1.02 trillion yuan on Dec. 30, according to data compiled by Bloomberg. That was up from 757 billion yuan on Nov. 21. Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles.

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“.. Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%.”

Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)

After months of preaching monetary discipline to fend off inflation, Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%. Close observers shouldn’t have been surprised. India’s central banker, who famously predicted the 2008 global crisis, warned in an op-ed just yesterday that several of the world’s major economies were “flirting with deflation,” with dire implications for emerging markets like his. The threat of global “secular stagnation” – combined with lower prices in India – no doubt prompted him to act. The question is why Rajan’s peers across the region don’t appear to appreciate the danger. Just today, South Korea’s central bank courted its own deflationary funk by holding benchmark interest rates steady at 2%, even as consumer prices advance at the slowest pace since 1999.

While energy costs in Indonesia are rising due to the lifting of fuel subsidies, economist Daniel Wilson of ANZ warns that prices overall are set to slow or fall: “Disinflation synchronisation is in sight and it will be severe,” he says. From Beijing to Bangkok, Asian central banks seem too blinded by longstanding inflation fears to recognize the trends inexorably pushing prices downward. In a world of plunging commodity prices and weakening global demand, Asian economies that have traditionally depended on exports are going to have to do all they can to gin up growth. Since most of the tools available to governments – increasing spending, lowering trade barriers, loosening labor markets – can’t have an immediate impact, the burden falls on central banks to act. That’s the only sure way to ease strains in credit markets, relieve hard-pressed borrowers and boost investments.

So why aren’t they? An overly doctrinaire fear of inflation explains much of the reluctance. Take the Philippines, where consumer prices are rising just 2.7% and the economy is growing 5.3%. On Dec. 12, central bank Governor Amando Tetangco said cheaper oil gave him “some scope” to leave interest rates unchanged. Since then, Brent crude has fallen to about $48 a barrel, the World Bank has downgraded its 2015 global growth forecast to 3% from 3.4% and Europe has neared a new crisis. Last week, the Philippines government sold $2 billion of 25-year debt at a record-low yield of 3.95%. Markets aren’t always right, but it sure seems time for Tetangco to move the benchmark rate below 4%.

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“.. whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable.” Well, better be careful then?!

Specter Of Fascist Past Haunts European Nationalism (Reuters)

When up to a dozen world leaders and roughly 1.5 million people gathered in Paris on Sunday to mourn the murder of 10 editors and cartoonists of the satirical newspaper Charlie Hebdo and seven other people by three French-born Islamic radicals, they wanted to demonstrate that Europe will always embrace liberal and tolerant values. But the more telling event may turn out to be a counter-rally that took place at a 17th-century town hall in Beaucaire, France, that was led by Marine Le Pen, the leader of the far-right National Front. In Beaucaire, the crowd ended Le Pen’s rally by singing the French national anthem and chanting, “This is our home.” Le Pen is at the forefront of a European-wide nationalist resurgence – one that wants to evict from their homelands people they view as Muslim subversives.

She and other far-right nationalists are seizing on some legitimate worries about Islamic militancy – 10,000 soldiers are now deployed in France as a safety measure – in order to label all Muslims as hostile to traditional European cultural and religious values. Le Pen herself has likened their presence to the Nazi occupation of France. Le Pen herself espouses an authoritarian program that calls for a moratorium on immigration, a restoration of the death penalty and a “French first” policy on welfare benefits and employment. Long after World War Two, fascism is a specter that still haunts the continent. But whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable. The borderline between the kind of populism they espouse and the outright fascism of the 1920s and 1930s, when Adolf Hitler and Benito Mussolini espoused doctrines of racial superiority, is a slippery one.

Scholars continue to debate whether Mussolini was even fascist – or simply an opportunistic nationalist. The real aim of today’s would-be authoritarians – politicians who appeal to the public’s desire for an iron hand – is to present themselves as legitimate leaders who are saying what the public really thinks but is afraid to say. And these far-right leaders are indeed increasingly popular. The card they are playing is populism presented as an aggrieved nationalism. They depict Europeans as victims of rapacious Muslim immigrants. Le Pen, Britain’s Nigel Farage of the U.K. Independence Party and others aim to come across as reasonable and socially acceptable, while sounding dog whistles to their followers about immigrant social parasites who are either stealing jobs from “real” Europeans or living off welfare.

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“This new acceleration is about 25% higher than previous estimates ..”

Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

The rate at which the global oceans have risen in the past two decades is more significant than previously recognised, say US-based scientists. Their reassessment of tide gauge data from 1900-1990 found that the world’s seas went up more slowly than earlier estimates – by about 1.2mm per year. But this makes the 3mm per year tracked by satellites since 1990 a much bigger trend change as a consequence. It could mean some projections for future rises having to be revisited. “Our estimates from 1993 to 2010 agree with [the prior] estimates from modern tide gauges and satellite altimetry, within the bounds of uncertainty. But that means that the acceleration into the last two decades is far worse than previously thought,” said Dr Carling Hay from Harvard University in Cambridge, Massachusetts.

“This new acceleration is about 25% higher than previous estimates,” she told BBC News. Dr Hay and colleagues report their re-analysis in this week’s edition of the journal Nature. Tide gauges have been in operation in some places for hundreds of years, but pulling their data into a coherent narrative of worldwide sea-level change is fiendishly difficult. Historically, their deployment has been sparse, predominantly at mid-latitudes in the Northern Hemisphere, and only at coastal sites. In other words, the instrument record is extremely patchy. What is more, the data needs careful handling because it hides all kinds of “contamination”. Scientists must account for effects that mask the true signal – such as tectonic movements that might force the local land upwards – and those that exaggerate it – such as groundwater extraction, which will make the land dip.

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Dec 042014
 
 December 4, 2014  Posted by at 2:28 pm Finance Tagged with: , , , , , , , ,  3 Responses »


DPC Pittsburgh by Night 1907

News reports about developments in the oil markets are coming fast and furious, and none of them indicate any stabilization, let alone rise, in oil prices. Quite the contrary. There are very large amounts of extra barrels flowing into the market, which is just, as one analyst puts it “even more oil flooding the market that nobody needs.” Saudi Arabia looks set to battle for sheer market share, even if it sends strangely contradictory messages.

While the US shale industry aggressively tries to convey an attitude based on confidence and breakeven prices that suddenly are claimed to be much lower than what seemed common knowledge until recently. Bloomberg says today that most shale is profitable even at $25 a barrel, and we might want some independent confirmation and/or analysis of that. Just hearing the industry claim it seems a bit flimsy; they have plenty reasons to paint the picture as rosy as they can get away with.

Last night, the Wall Street Journal reported on a Saudi price cut for the US, and a simultaneous price hike for Asia.

Saudi Price Cut Upends Oil Market

Oil prices tumbled to their lowest point in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S., likely paving the way for further declines and adding to pressure on American energy producers. The decision by the world’s largest oil exporter sent the Dow industrials into negative territory for the day amid concerns about the pace of global growth. The move heightened worries over the resilience of the U.S. oil industry, which has expanded rapidly in recent years.

But that growth, driven largely by new production technology used to extract oil from shale-rock formations, has never been tested by a prolonged slump in prices. While lower crude prices generally help consumers by reducing the amount they pay for gasoline, analysts said falling energy prices will squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt loads. Meanwhile, Saudi Arabia raised the prices for its oil in other locations, including Asia, where the country had cut its prices for four consecutive months.

Which led Barron’s to speculate on energy ETFs.

Saudi Oil Price Cut Dings Energy ETFs

Saudi Arabia’s unexpected price cut to oil it ships to the U.S. is roiling the market for crude and squeezing a host of exchange-traded funds that hold energy stocks. The United States Oil Fund (USO) sinks 2.2% to $$29.12 in early trading, while iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) falls 2.3%. West Texas Intermediate crude futures dropped to the lowest level in three years, recently down 2.1% to $76.77 a barrel.

Oil futures prices have tumbled by about one-quarter in recent months in a world awash with oil after production increases in the U.S. and, more recently, Libya. For weeks, speculation has swirled that the Saudis might be keen to hold prices low in order to keep a tight grip on market share and choke off competitors. Monday’s move by Saudi Arabia to cut prices for crude exports to U.S. customers, while at the same time a raising the prices it charges to countries in Asia, provides more evidence that the Saudis are bent on quashing competition.

But then just now Reuters says ‘recalled’ an email that detailed the cuts:

Saudi Aramco Recalls Email Showing Steep Oil Price Cuts

Saudi Aramco said it was recalling an email it sent on Thursday which had announced a sharp drop in January official selling oil prices for Asia and the United States. Official Selling Prices (OSPs) for oil from Saudi Arabia, OPEC’s largest producer and exporter, have been eagerly watched by the market in recent months for indications of the kingdom’s oil policies.

Some analysts have said sharp drops in OSPs over the past months are an indication the kingdom is fighting for market share with other producers, but others have said the OSPs only reflect the market and are a backward-looking rather than a forward-looking indicator.

“(The) Saudis making it clear they don’t want to lose market share,” Richard Mallinson, analyst at consultancy Energy Aspects told Reuters Global Oil Forum before Aramco recalled prices. It was not clear whether Aramco was recalling all prices or only some prices, or what changes if any had been made. It was also unclear whether and when a new email might follow.

The email, which was later recalled, showed Aramco had cut its January price for its Arab Light grade for Asian customers by $1.90 a barrel from December to a discount of $2 a barrel to the Oman/Dubai average. The Arab Light OSP to the United States was set at a premium of $0.90 a barrel to the Argus Sour Crude Index for January, down 70 cents from the previous month. The email also said Arab Light OSPs to Northwest Europe were raised by 20 cents for January from the previous month to a discount of $3.15 a barrel to the Brent Weighted Average.

That $24 a barrel breakeven price for shale contrasts somewhat with what Abhishek Deshpande, lead oil analyst at Natixis, says about Saudi oil: “..because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.”

Collapse Of Oil Prices Leads World Economy Into Trouble

OPEC, the largest crude-oil cartel in the world, wanted others to feel its pain as oil prices collapsed. “OPEC wanted … to cut off production … and they wanted other non-OPEC [countries], especially in the US and Canada, to feel the pinch they are feeling,” says Abhishek Deshpande, lead oil analyst at Natixis. But in its rush to influence others, OPEC ended up hurting everyone in the process – including itself. Low oil prices, pushed down further by OPEC’s meeting last week,have impacted world economies, energy stocks, and several currencies. From the fate of the Russian rouble to Venezuelan deficits to American mutual funds full of Exxon or Chevron stock, OPEC’s decision was the shot heard round the world for troubled commodities.

So how low could oil go? Standard Chartered analysts expect a “chaotic” quarter ahead, saying OPEC’s decision to keep the production target unchanged is “extremely negative for oil prices for 2015”. The bank slashed its 2015 average price forecast for Brent crude oil by $16 a barrel to $85. Other forecasts are lower. Citi Research estimated an average 2015 price of $72 for WTI and $80 for ICE Brent. Natixis’s Deshpande said their average 2015 Brent forecast is around $74, with WTI around $69. These prices have real-world effects on world economies. Everyone in the sector is smarting. Deshpande said because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.

Other OPEC members have even higher budgetary breakevens. Saudi Arabia is sitting on a “war chest” of money it stockpiled when prices were high, Deshpande said. Citi analysts said Saudi Arabia has about $800bn in cash reserves. Venezuela, on the other hand, is a prime example of a country squandering its riches. Citi said for every $10 drop in oil prices Venezuela loses about $7.5bn in revenues. “Already weak fiscally, this should call for reducing energy subsidies. But domestic politics including the 2015 election makes this nearly impossible,” they said. OPEC countries as a whole could lose $200bn in revenue if Brent prices stay at $80, which is about $600 per capita annually, Citi said.

And that in turn makes you wonder how the Saudis feel about Bakken shale oil being sold at $49.69 a barrel.

Sub-$50 Oil Surfaces in North Dakota As Regional Discounts Swell

Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there. Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American Pipeline LP. That’s down 47% from this year’s peak in June, and 29% less than the $70.15 paid for Brent, the global benchmark. The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.

“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.” Discounted prices at the wellhead have been exacerbated by a 39% drop in Brent futures since June 19 to $69.92 a barrel yesterday. Prices have fallen as global demand growth fails to keep pace with surging oil production from the U.S. and Canada. Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel Dec. 2. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.

American consumers probably still feel good about developments like ever lower prices at the pump, but they should be careful what they wish for.

First U.S. Gas Station Drops Below $2 a Gallon

$2 gasoline is back in the U.S. An Oncue Express station in Oklahoma City was selling the motor fuel for $1.99 a gallon today, becoming the first one to drop below $2 in the U.S. since July 30, 2010, Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization Inc., said by e-mail from Chicago. “We knew when we saw crude oil prices drop last week that we’d break the $2 threshold pretty soon, but we didn’t know if it would happen in South Carolina, Texas, Missouri or Oklahoma,” said DeHaan, senior petroleum analyst for GasBuddy. “Today’s national average, $2.74, now makes the current price we pay a whopping 51 cents per gallon less than what we paid a year ago.”

Gasoline is sliding after OPEC decided last week not to cut production amid a global glut of oil that has already dragged international oil prices down by 37% in the past five months. Pump prices have fallen by almost a dollar since reaching this year’s high on April 26. 15% of the nation’s gas stations are selling fuel below $2.50 a gallon, “and it may not be long before others join OnCue Express in that exclusive club that’s below $2,” said Gregg Laskoski, another senior petroleum analyst with GasBuddy. Retail gasoline averaged $2.746 a gallon in the U.S. yesterday, data compiled by AAA show. Stations will cut prices by another 15 to 20 cents a gallon as they catch up to the plunge in oil, AAA’s Michael Green said.

And here’s the reason to be careful with those wishes: job losses.

Norway Seeks to Temper Its Oil Addiction After OPEC Price Shock

After the biggest slump in oil prices since the start of the global financial crisis, the prime minister of Norway says western Europe’s largest crude producer must become less reliant on its fossil fuels. “We need new industries, a new tax system and a better climate for investment in Norway,” Prime Minister Erna Solberg said yesterday in an interview in Oslo. The comments follow threats from SAFE, one of Norway’s three main oil unions, which warned this week it will respond with industrial action unless the government acts to stem job losses. Solberg said that far from triggering government support, plunging oil prices should be used by the industry as an opportunity to improve competitiveness.

A 39% slump in oil prices since June is killing jobs in Norway, which relies on fossil fuels to generate more than one-fifth of its gross domestic product. In the past few months, Norway has lost about 7,000 oil jobs and SAFE said this week it was up to the government to reverse that trend. Solberg says protecting oil jobs will ultimately make it harder for the economy to wean itself off its commodities reliance. “We need to lower our cost of production in the development of new fields,” she said. “Oil production is not going to rise, it will slowly fall in Norway.”

And may I volunteer as an aside that Norway’s intentions to become less reliant on oil are perhaps a little past their best before date? They have this large sovereign oil fund, but never thought of using it to diversify their economy?

Perhaps the numero uno reason that oil prices will keep sinking is production becoming available in the Middle East. And in North Africa, where Libya recently reportedly brought an extra 800,000 barrels/day to the fray. Now it’s Iraq’s turn. Bloomberg put 300,000 barrels in its headline, only to say this in the article: “As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route”. I corrected the headline.

There Are 550,000 Iraqi Barrels Signaling Oil Glut Will Deepen

Not only is OPEC refraining from cutting oil output to stem the five-month plunge in prices, it’s adding to the supply glut. Just five days after OPEC decided to maintain production levels, Iraq, the group’s second-biggest member, inked an export deal with the Kurds that may add about 300,000 barrels a day to world supplies. In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June. Or as Carsten Fritsch, analyst at Commerzbank, put it: There’ll be “even more oil flooding the market that nobody needs.”

Benchmark Brent crude slumped immediately after the deal was signed Dec. 2 in Baghdad, dropping 2.8% to $70.54 a barrel. Prices, which slipped 0.9% yesterday to reach the lowest since 2010, were at $70.38 at 1:30 p.m. Singapore time today. Futures are down about 10% since OPEC’s Nov. 27 decision. The agreement seeks to end months of feuding between the Kurds and officials in Iraq over the right to crude proceeds, a dispute that has hindered their joint effort to push back Islamic State militants. The deal allows for as much as 550,000 barrels a day of crude to be shipped by pipeline from northern Iraq to the Mediterranean port of Ceyhan in Turkey, according to the regional government. The Kurds were already exporting about 220,000 barrels daily, according to data compiled by Bloomberg.

The Kurdish Regional Government expanded its control of Iraq’s oil resources in June when it deployed forces to defend Kirkuk, the largest field in the north of the country, from Islamic militants. The Kurds have been shipping crude through Turkey in defiance of the central government, which took legal action to block the sales, leaving some tankers loaded with Kurdish oil stranded at sea. As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route, according to the government in Baghdad.

What it will all lead to, and increasingly so as prices fail to recover and instead keep falling, is the disappearance and withdrawal of financing in the oil industry, especially the insanely overleveraged shale patches. The financiers will need a little more time to consolidate, minimize and liquidate their losses, but they will get up and leave. So all the talk of growing the industry sounds just a tad south of fully credible. This is an industry that lost over $100 billion a year for at least three years running, i.e. didn’t produce sufficient revenue even at $100 a barrel, and at $60 they would be fine, without much of their previous external financing?

Energy Junk-Debt Deals Postponed as Falling Oil Saps Demand

Two energy-related companies are postponing financings after a plunge in oil prices made their high-yield, high-risk debt more difficult to sell. New Atlas, a newly formed unit of oil and gas producer Atlas Energy Group, put on hold a $155 million loan it was seeking to refinance debt, according to five people with knowledge of the deal, who asked not be identified because the decision is private. EnTrans International, a manufacturer of equipment used in fracking, delayed selling a $250 million bond, according to three other people with knowledge of that transaction. Investors in bonds of junk-rated energy companies are facing losses of more than $11 billion as oil prices dropped to a five-year-low of $63.72 a barrel this week. This is deepening concern that the riskiest oil explorers won’t be able to meet their obligations, and sending their borrowing costs to the highest since 2010.

More than half of Cleveland, Tennessee-based EnTrans’s revenue comes from equipment sales to the hydraulic fracturing and the energy industry, Moody’s Investors Service said in a Nov. 17 report. The notes, which were being arranged by Credit Suisse, would have been used to refinance debt. Gary Riley, chief executive officer at EnTrans International, said yesterday in an e-mail commenting on the deal status that “the decision to defer or go forward has not been made.” Riley didn’t respond to questions seeking comment today. Deutsche Bank and Citigroup were managing New Atlas’s financing and had scheduled a meeting with lenders for this morning, according to data compiled by Bloomberg.

Perhaps those sub-$50 Bakken prices tell us pretty much where global prices are ahead. And then we’ll take it from there. With 1.8 million barrels “that nobody needs” added to the shale industries growth intentions, where can prices go but down, unless someone starts a big war somewhere? Yesterday’s news that US new oil and gas well permits were off 40% last month may signal where the future of shale is really located.

But oil is a field that knows a lot of inertia, long term contracts, future contracts, so changes come with a time lag. It’s also a field increasingly inhabited by desperate producers and government leaders, who wake up screaming in the middle of the night from dreaming about their heads impaled on stakes along desert roads.

Aug 242014
 
 August 24, 2014  Posted by at 5:22 pm Finance Tagged with: , , , , , ,  10 Responses »


Marjory Collins On the trolley in Baltimore Apr 1943

As the first subglacial eruption has been registered in the Barbardunga volcano, and there are earthquakes in the region about every minute, a German magazine reports that Berlin (or, actually, even Bonn) has been spying on NATO partners like Turkey for decades. Which is funny, because I was just wondering – with a degree of suspicion – where and how Merkel gets her information.

She’s in Kiev calling for a ceasefire – which at least is a step up from what Washington is doing -, but says that first the border between Ukraine and Russia needs to be sealed off so no more support for the rebels can be smuggled in. See, I’m getting the idea that perhaps Angela relies for these kinds of claims on information she gets from NATO, who in turn get it from Kiev. Which has proven to be the most unreliable source of information in a long time.

On Tuesday, presidents Putin and Poroshenko, and some EU leaders, will meet in Minsk, Belarus, for discussions on the ceasefire. It’s starting to look like “our” side is going into the talks with so many demands, and of such obviously impossible nature for Putin, that they will kill any serious discussion before it’s even started.

Over the past few days, NATO has claimed that the Russian aid convoy, which returned home on Saturday without any incidents, was a Trojan horse, “a disguised attempt to reinforce separatist forces”. And that the Russians are shelling the Ukraine army both cross-border and from within Ukraine. And that there are huge troop concentrations and movements happening at the Russian side of the border. And that Russia is delivering weapons and mercenaries into Ukraine. These are all things that Ukraine claimed first, and NATO simply repeated. And, you know what’s coming next, for none of it has one single piece of evidence been presented. Something we’ve long since ceased to expect from Kiev.

But NATO itself has the technology, the ability to find and present evidence. And the obligation to us, the people who pay for its entire apparatus, do so prior to making any claims. So why does it simply parrot Kiev claims, and in very aggressive language to boot, instead of finding its own truths, and present us with proof? I’m guessing it’s a combination of the proof simply not being there, and the same hubris that’s prevalent in Washington.

The Ukraine army claimed yesterday that the returning aid convoy trucks had taken ‘equipment from a factory in Luhansk that makes firearm magazines and a Topaz plant that produces radars’. And taken it back with them to Russia. They gave no reason why this would have been done, nor, once again, any proof that it happened at all. Inspections of the trucks as they crossed back over the border showed nothing.

Angela Merkel yesterday refused to rule out yet more sanctions against Russia. While Poroshenko today held a large military parade in Kiev, and vowed to spend $3 billon to prop up the Ukraine army. Funny, because Ukraine is not just bankrupt, it’s way beyond that stage. Which in fact means the west has pledged those $3 billion, in addition to all the other billions “invested” in Ukraine, to prop up that army. On the eve of the peace talks that Putin will attend.

Perhaps this is inevitable. NATO was a child of WWII and even more of the Cold War. It can be argued that it had an important function in keeping Europe out of Russian hands. So far, so good, you might think. But NATO also grew into a behemoth of an organization that is extremely secretive about its intelligence, and as such a potential powder keg, a state within its member states. The sort of institution that’s very hard to get rid of, because it acquires political power in and of itself.

NATO lost the enemy it had been built to withstand, 25 years ago when the Berlin wall came down. Given all that, it shouldn’t come as a big surprise that, provided a few hot heads rose up in its ranks, it would turn into an alliance looking for an enemy. This process began to take shape some 15 years after the Soviet Union fell apart, and NATO, despite clearly defined commitments not to, started expanding eastward. The US House voted on a resolution to officially authorize this expansion, and Ron Paul said this about it on the House floor on April 1, 2008:

Mr. Speaker, I rise in opposition to this resolution calling for the further expansion of NATO to the borders of Russia. NATO is an organization whose purpose ended with the end of its Warsaw Pact adversary. When NATO struggled to define its future after the Cold War, it settled on attacking a sovereign state, Yugoslavia, which had neither invaded nor threatened any NATO member state.

This current round of NATO expansion is a political reward to governments in Georgia and Ukraine that came to power as a result of US-supported revolutions, the so-called Orange Revolution and Rose Revolution. The governments that arose from these street protests were eager to please their US sponsor and the US, in turn, turned a blind eye to the numerous political and human rights abuses that took place under the new regimes. Thus the US policy of “exporting democracy” has only succeeding in exporting more misery to the countries it has targeted.

NATO expansion only benefits the US military industrial complex, which stands to profit from expanded arms sales to new NATO members. The “modernization” of former Soviet militaries in Ukraine and Georgia will mean tens of millions in sales to US and European military contractors. The US taxpayer will be left holding the bill, as the US government will subsidize most of the transactions.

Providing US military guarantees to Ukraine and Georgia can only further strain our military. This NATO expansion may well involve the US military in conflicts as unrelated to our national interest as the breakaway regions of South Ossetia and Abkhazia in Georgia. The idea that American troops might be forced to fight and die to prevent a small section of Georgia from seceding is absurd and disturbing.

Mr. Speaker, NATO should be disbanded, not expanded.

Dr. Paul reiterated some of this a few days ago, when he launched a fund raiser for the Ron Paul Insititute for Peace and Prosperity, on his birthday:

We are fighting the war party, challenging their propaganda at every turn. But we are on the ropes and we need your help – as I write this to you they are trying to lie us into yet another war that could be the end of us all. Our job is to tell the truth and to expose their lies.

That’s why I founded the Ron Paul Institute for Peace and Prosperity, and right now I am especially concerned about the drive to war against Russia. Indeed, I have never seen such a dangerous stand-off between nuclear powers. The US government continues to add sanction upon sanction against Russia over a civil war in Ukraine resulting from a US-staged coup.

The propaganda over the Malaysian jetliner, and the pushing of NATO missiles right up to the Russian border – to take just two worrisome events – are chilling. How would Americans react to Russian missiles on the Texas border?

But Paul is a lone voice in the desert. Unfortunately. More than ever in the past 25 years. NATO’s back! And it’s got a new leader:

NATO Secretary General Anders Fogh Rasmussen said Friday the alliance has observed an alarming buildup of Russian ground and air forces in the vicinity of Ukraine. “We have also seen transfers of large quantities of advanced weapons, including tanks, armored personnel carriers and artillery to separatist groups in eastern Ukraine,” Rasmussen said in a statement. Rasmussen said Russia continued to escalate the crisis in eastern Ukraine and that this could lead to further isolation of Moscow.

He also condemned Russia for sending a “so-called humanitarian convoy” into Ukraine without the consent of the Ukrainian authorities and without any involvement of the International Committee of the Red Cross. “It can only deepen the crisis in the region, which Russia itself has created and has continued to fuel,” Rasmussen said in a statement. He said it was a blatant breach of Russia’s international commitments.

And Rasmussen’s been making similar statements as long as any journalist was willing to listen. Which is not that long, since only with Ukraine NATO has found itself a long and badly desired stage again. And don’t let’s forget NATO’s other preferred media go-to guy:

Nato’s Supreme Allied Commander, U.S. Air Force General Philip Breedlove, accused Russia of using the convoy as “a front for the resupply of separatists and Russian operatives”.

If there is a place for NATO in the world today, it must be as a force for peace. If not, it can only be a war mongerer, a tool for what Dr. Paul calls the war party. NATO started as a deterrent force, a united stand versus Russia’s alleged expansionist aspirations post-WWII. How real those were is questionable, but what is not is that they are now in the past. NATO’s recent aggressive language is not. And neither is its endless string of unproven claims about Russia.

German vice-chancellor Sigmar Gabriel yesterday talked about a wish for the federalization of Ukraine. But because that appears to be a sensitive topic in Ukraine, Chancellor Angela Merkel said he had meant ‘decentralization’. Apparently, Poroshenko supports such a thing. To grant a few more ‘rights’ to what remains of east Ukraine, as it will supposedly still be ruled by Kiev, which just destroyed much of its infrastructure and killed thousands of Ukrainian citizens there.

Yeah, that should work. It’s not like Kiev will finance the rebuilding of the area, because it’s already devoting what funds are left, to rebuilding the very army that ransacked east Ukraine. Does anyone think that Putin will say yes to this, that the rebels will lay down their arms and risk being slaughtered by what poses as the Ukraine army, the sturmtroops and mercenaries?

We’ve seen no evidence that Putin arms and supports the rebels, we’ve only seen allegations. But we do have proof of far-reaching western involvement in Ukraine, of billions in financial support, of US secret service operatives, US mercenaries, and swastika waving Ukrainians. What side are we on again? And how did we get there?

But all may not be lost for NATO. It may even find itself spread thin. As we get news that Iranian soldiers are fighting in Iraq against IS, a weird pair of bedfellows, along with the US and the Kurds (Iran also just announced it downed an Israeli drone), the Observer has a report that NATO should find interesting, and the rest of us alarming:

IS Surges Towards The Borders Of Turkey As West Mulls Options

Islamic State extremists are pushing to secure the border between Turkey and north-western Syria as the main gateway for recruits to join the caliphate they have imposed across much of eastern Syria and western Iraq. Large numbers of jihadists from Islamic State (formerly Isis) are moving this weekend towards the Turkish border area, about 60 miles north of Aleppo, in columns of armoured trucks that they looted from abandoned Iraqi military bases.

The area is now one of the most active front lines in the group’s attempt to redraw the borders of the Levant, a campaign that will have huge ramifications for Turkey. Residents and Syrian opposition militants in the town of Marea, close to the Turkish border, on Saturday said that Isis had advanced to within sight of the town and had sent envoys to negotiate access. “They could storm in like the Mongols, if they wanted to,” said a fighter from Syrian rebel group Islamic Front. “But they’re trying to be nice. We have dealt with them before. There is no reconciling with them. We will have to fight.”

[..] “The Turkish border is the only way to smuggle oil, weapons and foreign fighters into [Iraq and Syria],” said Dr Hisham al-Hashimi, an Iraqi expert on Isis. “If it’s closed, it will cut three things: funding, an entrance for the foreign fighters and links to Europe which they are trying to open. If those plans are destroyed, they will aim for another gate to Lebanon.”

some senior figures in the Middle East and Europe say Turkey has facilitated either through neglect or undeclared policy. “Let’s see how they react to the latest Isis advance,” said one regional leader on Saturday. “For more than a year now people have been telling them this has got out of control. They have to seal their border now. This so-called caliphate cannot be allowed to stand.” Al-Hashimi said Ankara would now be forced to act. “This time Turkey will do something and block the borders because they don’t trust Isis any more after they attacked Kurdistan. They understand now that Isis could turn on them.”

Guess what? Turkey, even if Germany has been spying on it for decades, and its new president has been highly critical of the US and the rest of the west, is a member of … NATO! And NATO is based on one for all, all for one. If any of its member states are attacked, all others are obligated to come to its defense. IS know this, and it therefore also knows how to draw the US and Europe into the next major war. At a time of its choosing.

Pressure Builds Within Fed To Signal New Policy Course (Reuters)

Pressure is building within the Federal Reserve for officials to move as early as next month to more clearly acknowledge improvements in the U.S. economy and lay the groundwork for the central bank’s first interest rate hike in nearly a decade. According to some U.S. central bankers and their close advisers, signs of economic resilience and growing anxiety about the risks of holding rates too low for too long have set the stage for an intense debate over rewriting their policy statement. It is uncertain whether officials will use their upcoming meeting on Sept. 16 and 17 to scrap key parts of the language they have been using to keep rate-hike expectations at bay, but if they do not, October looks like a good bet. “Some shift of language is on the table, and should be on the table in the coming meetings,” Atlanta Federal Reserve Bank President Dennis Lockhart, a policy centrist, said in an interview. While a handful of officials have argued for prompt changes, Lockhart said he thinks September “is still early.”

Adding, dropping or adjusting even a few words in the Fed’s post-meeting statement is a potentially treacherous task. A miscommunication by the world’s most powerful central bank could shock financial markets globally and, in a worst case, reverse the economic recovery it seeks to foster. At issue is a 5-month old pledge from the Fed to keep benchmark rates near zero for a “considerable time” after it shelves an asset-purchase program in October. Another line that has drawn internal objections is the month-old statement that “significant” slack remains in the labor market, a suggestion that not even strong job growth and a further drop in unemployment will prompt a tightening of policy any time soon. “The language puts us in a box that I think is not a good box to be in,” Philadelphia Fed President Charles Plosser told Reuters on the sidelines of the central bank’s annual Jackson Hole conference.

Read more …

ECB’s Mario Draghi Signals Departure From Austerity Focus (WSJ)

European Central Bank President Mario Draghi on Friday signaled a departure from the austerity-focused mind-set that has dominated economic policy-making in the euro zone since the onset of the region’s debt crisis nearly five years ago, as officials struggle with stagnant economies, weak prices and high unemployment. Speaking at the Federal Reserve Bank of Kansas City’s annual conference Jackson Hole, Wyo., Mr. Draghi said European central bankers and politicians each have a role to play in boosting demand and reducing joblessness. For its part the ECB is willing to take more stimulus measures if needed to keep low rates of inflation from becoming embedded in expectations of future price growth, he said. “It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this, while taking into account our specific initial conditions and legal constraints,” Mr. Draghi said in his prepared remarks.

Although Mr. Draghi’s comments didn’t constitute an endorsement of rampant deficit spending to boost euro-zone economies, they nevertheless marked a shift away from years of preaching by ECB officials that governments needed to shrink deficits and undertake economic reforms even during times of economic weakness. Critics say that mixing fiscal austerity with labor-market reforms exacerbated Europe’s downturn, even though they have long-term payoffs. Mr. Draghi’s comments came days after a report showed that the euro-zone economy stalled in the second quarter, fanning fears that the bloc’s roughly $13.5 trillion economy is stuck in a lasting rut of stagnation and high unemployment.

The GDP data “confirm that the recovery in the euro area remains uniformly weak, with subdued wage growth even in non-stressed countries suggesting lackluster demand,” he said. His remarks signaled a new approach to these risks: combining policies to stimulate demand with efforts to make labor markets more flexible. With inflation at very low levels—annual inflation in the euro zone was just 0.4% last month, far below the ECB’s 2% target—policy makers should cast aside any fears that stimulus policies may lead to inflation and instead focus on keeping high unemployment from taking root in Europe, he suggested. The euro zone’s unemployment rate was 11.5% in June, far higher than in the U.S., U.K. and Japan. “The risks of ‘doing too little'” and allowing temporary unemployment to become more entrenched “outweigh those of ‘doing too much’—that is, excessive upward wage and price pressures,” Mr. Draghi said.

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Real cost of capital is very high for PIIGS.

The Real Cost of Capital: Eurozone ‘Periphery’ Dilemma (Gurdgiev)

Staying on the topic of debt, here is IMF research on real cost of corporate capital (linked to the cost of debt) in the Euro area ‘periphery’ (this is from an IMF July 2014 publication that accompanied its Article 4 paper on Euro Area). I highlighted with the red the range of recent capital costs range in each country to trace out historical comparatives. … [the] real cost of capital across the euro area ‘periphery’ shows one simple thing: investment is still a very costly proposition for businesses, especially compared to the pre-crisis period. Starting with the Euro area as a whole:

Two points:
• Current real cost of capital across the euro area is relatively benign, compared to both 1990s – early 2000s period and shows low volatility in recent (crisis) years post 2009 peak
• 2009 peak is pronounced but moderate compared to the one found in some ‘peripheral’ countries.

In basic terms, this means that euro area’s capital costs are benign – above the 2004-2007 trough, but historically well below those observed in the 1990s.

Spain:

Two points:
• Current capital cost levels are consistent with crisis peak
• Capital today is as expensive in real terms as in the pre-euro era.

Which means that Spanish real cost of capital is now as bad as in the pre-euro period and is much worse than during the credit boom of the late 1990s-early 2000s.

Read more …

G-20′ Solution To Unstable, “Too Big To Fail” Banks: More Debt (Zero Hedge)

It’s been 6 years since Lehman went bankrupt overnight, stunning bondholders who were forced to reprice Lehman bonds from 80 to 8 in a millisecond, and launching the world’s worst depression since the 1930s, which courtesy of some $10 trillion in central bank liquidity injections, has been split up into several more palatable for public consumptions “recessions”, of which Europe is about to succumb to the third consecutive one even if for the time being the Fed’s has succeeded in if not breaking the business cycle, then certainly delaying the inevitable onset of the next major contraction in the US economy.

Paradoxically, instead of taking advantage of this lull in volatility and relative economic calm, and making the financial system more stable, all so-called regulation has done, is paid lip service to the underlying problems, hoping that should the next crisis appear the Fed will be able to delay it yet again by throwing countless amounts of taxpayer money at the problem. In the meantime, the biggest banks have gotten so big that the failure of one JPM or Deutsche Bank, and their hundreds of trillions in gross notional derivatives, would lead to the biggest financial and economic catastrophe ever witnessed and make 2008 seem like a fond memory of economic euphoria.

So finally, with a 6 year delay, the western world’s “government leaders” have finally decided to do something about a TBTF problem that has never been more acute. According to Reuters, in November said leaders will agree “that the world’s top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue, industry and G20 officials said.” In other words, suddenly the $2.8 trillion in Fed injected excess reserves, split roughly equally between US and European banks, are no longer sufficient, and while regulators are on one hand delaying the implementation of Basel III and its tougher capital rules, on the other they are tacticly admitting that whatever “generous” capital buffer banks have on their books right now will not be sufficient when the next crisis strikes.

Read more …

I love the term ‘property porn’

Soaring House Prices In Dublin Spark Fears Of New Property Bubble (Observer)

The spectre of property speculation is stalking Ireland once more, as soaring house prices in Dublin bring warnings that the country is in danger of repeating the mistakes that brought the economy to its knees during the financial crisis. Property prices in the Irish capital are rising by an average of €6,600 a month, according to the country’s Central Statistics Office, which puts them 24.4% higher than last year. But as demand for new homes now outstrips supply across Ireland, the body representing mortgage holders warns that the country is becoming obsessed again with inflated house prices. The Irish Mortgage Holders Organisation (IMHO) points out that the legacy of the boom-to-bust years is still weighing on thousands of households. Figures from Ireland’s central bank show 35,000 homeowners unable to pay their mortgages for up to 24 months, and 135,000 households in mortgage arrears, despite an economic upturn and expectations that GDP will grow by 2.5% this year.

IMHO founder David Hall said: “People crippled by debt and paying new austerity taxes such as property tax and upcoming water taxes are watching with shock at the new development of property porn. We see commentary after commentary that prices are rising and negative equity is reducing, yet this is no comfort to those crippled in debt. A reduction in negative equity might be of benefit to banks who consider repossessing homes. But increases in property prices do not help with a family’s affordability in paying their mortgage.” Hall accuses Ireland’s banks and property industry of fuelling a fake mini-boom. He claims it is designed to increase the paper assets of Irish banks before they face stress tests from the European Central Bank in October. “This property bubble being developed by vested interests needs bursting and bursting sooner rather than later,” he added. “The financial system owes a gratitude to the Irish citizen for keeping it afloat and now it needs to back off irresponsible promoting of a property bubble, which could land many citizens in deep financial trouble again.”

Read more …

Drowning in debt.

Swedish Household Debt Soars As Election Nears (Reuters)

Johan and Alejandra are the kind of Swedes the IMF has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out. The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans. “I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre. Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P. Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.

Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years. The IMF has warned financial instability in Sweden is an increasing concern and urged a comprehensive set of macroprudential measures to temper soaring mortgage debt. Nobel Prize laureate and economist Paul Krugman has chimed in, saying Sweden probably has a significant housing bubble. With Sweden’s household debt-to-income ratio above 170 percent – among the highest in Europe and rising – the issue is worrying Riksbank policymakers. Out of fear of spurring more borrowing, the central bank has kept interest rates higher than warranted by inflation, but they are nevertheless at historic lows. The main concern is that private consumption – which makes up nearly half of Swedish GDP – would suffer if rates rose or property prices fell, which could spell problems for the lenders and the economy, which is only just finding its feet.

Read more …

IS Surges Towards The Borders Of Turkey As West Mulls Options (Observer)

Islamic State extremists are pushing to secure the border between Turkey and north-western Syria as the main gateway for recruits to join the caliphate they have imposed across much of eastern Syria and western Iraq. Large numbers of jihadists from Islamic State (formerly Isis) are moving this weekend towards the Turkish border area, about 60 miles north of Aleppo, in columns of armoured trucks that they looted from abandoned Iraqi military bases. The area is now one of the most active front lines in the group’s attempt to redraw the borders of the Levant, a campaign that will have huge ramifications for Turkey. Residents and Syrian opposition militants in the town of Marea, close to the Turkish border, on Saturday said that Isis had advanced to within sight of the town and had sent envoys to negotiate access. “They could storm in like the Mongols, if they wanted to,” said a fighter from Syrian rebel group Islamic Front. “But they’re trying to be nice. We have dealt with them before. There is no reconciling with them. We will have to fight.”

The Syrian opposition fought a bitter and costly war with Isis in the same area in January, ousting them from ground they had used as a rallying point for foreign fighters and for a successful push into Iraq. The six-week battle cost the lives of more than 2,500 opposition fighters and allowed the Syrian regime, together with its proxies, to slowly encircle Aleppo from the north-west, a move which is likely to prove decisive in the Syrian civil war. Since that battle, the flow of foreign fighters from across the Turkish border to Isis has slowed. Isis now wants to reverse that, making it easier for anyone who wants to join them to cross a 130-mile strip of the frontier that has been used by the vast majority of foreign fighters, including British and European jihadists. “The Turkish border is the only way to smuggle oil, weapons and foreign fighters into [Iraq and Syria],” said Dr Hisham al-Hashimi, an Iraqi expert on Isis. “If it’s closed, it will cut three things: funding, an entrance for the foreign fighters and links to Europe which they are trying to open. If those plans are destroyed, they will aim for another gate to Lebanon.”

Western officials told the Observer that they were obliged to tread carefully when talking to the Turks about foreign passport holders suspected of trying to travel to Syria through Turkey. Using the term “extremist” or “terrorist” in official correspondence would generally lead nowhere, but Turkish officials were more forthcoming when inquiries were made about “those who abuse religion”. The battle over semantics underscores the deepening sensitivity surrounding the fast-growing regional extremist threat that some senior figures in the Middle East and Europe say Turkey has facilitated either through neglect or undeclared policy. “Let’s see how they react to the latest Isis advance,” said one regional leader on Saturday. “For more than a year now people have been telling them this has got out of control. They have to seal their border now. This so-called caliphate cannot be allowed to stand.” Al-Hashimi said Ankara would now be forced to act. “This time Turkey will do something and block the borders because they don’t trust Isis any more after they attacked Kurdistan. They understand now that Isis could turn on them.”

Read more …

Ukraine Announces $3 Billion Army Investment At Military Parade (BBC)

Ukraine’s president has announced that almost $3bn will be spent on re-equipping the army after an “exhausting” campaign against pro-Russian rebels. Petro Poroshenko said that a “constant military threat will hang over Ukraine” for the foreseeable future. He was speaking ahead of a large military parade in the capital Kiev. Meanwhile, fighting continues in eastern Ukraine, where more than 2,000 people have died in recent months. Mr Poroshenko said the investment would be spread out over two years, from 2015-2017. “The events of the last months have for us turned into a real war, albeit an undeclared one,” he said in a televised speech on Ukrainian independence day.

“Over the last six months, a new Ukrainian army has been born in heavy and exhausting fighting,” he said. The military parade featured hundreds of marching servicemen and military hardware. Critics said it was inappropriate when Ukraine was at war. Pro-Russian rebels in the eastern city of Donetsk – the scene of the heaviest fighting – say they will hold their own parade and display captured soldiers. More than 330,000 people have fled their homes because of fighting in eastern Ukraine. The bodies of six civilians, including a child, were seen by an AFP correspondent in Donetsk on Saturday.

Read more …

Merkel And Poroshenko Call For “Decentralised” Ukraine (Euronews)

German Chancellor Angela Merkel and Ukrainian President Petro Poroshenko presented a united front in Kyiv on Saturday over the crisis in eastern Ukraine. Their meeting came on the eve of Ukraine’s Independence Day celebrations, which Merkel will attend. The German Chancellor said that the open border between Russia and Ukraine must be controlled – either by the OSCE or another authority – before there could be any ceasefire. Both Merkel and Poroshenko stressed they wanted to ensure decentralisation but not federalisation of Ukraine along with respect for cultural and linguistic differences.

“Decentralisation in Ukraine – this is exactly what the President and myself want and what I support. I think as well that this is an important step to further include the Russian-speaking population,” Merkel said. Poroshenko thanked Merkel for her support of the Ukrainian people and for promised German and EU financial assistance to rebuild war-torn eastern Ukraine. “We all remember the Marshall Plan that helped post-war Europe. And today I can say that this is the beginning of a “Merkel Plan”, for the reconstruction of the infrastructure in the Donbass region. And I am very grateful for this”. Next week Russian and Ukrainian leaders along with top EU officials will meet in Belarus. Diplomats say Merkel is urging Poroshenko to be open to peace proposals when he meets Putin.

Read more …

Must see video. Smart cookie.

Putin Advisor Warns “Transition Has Always Come Through War” (Zero Hedge)

When we last met Sergei Glazyev, Vladimir Putin’s chief ‘integration’ adviser he explained “how the U.S. military and oligarchs are trying to maintain leadership in the global competition with China.” Arguably the best informed man in Russia, his perspective seems important to grasp as he considers:

“The world today is going through a year of overlapping cyclical crises. This is a period when the global economy is changing as the structure that has driven economic growth for 30 years has exhausted itself. The world needs to transition to a new system and transition has always come about through war… [..] The last elections to the European Parliament showed that all European citizens are not fooled by the false pro-American, anti-Russian propaganda… and by the constant stream of lies. [..] In order to avoid the constant threat of foreign asset confiscation, we need to build our own sovereign monetray macro-economic policy.”

As Glazyev concluded previously:

To further insulate its economy, Russia should abandon the use of the U.S. dollar as a reserve currency, according to Glazyev. Russia, which international reserves are the world’s fifth-biggest, needs to diversify its holdings to include China’s yuan, India’s rupee and Brazil’s real. “If a country aspires to reserve status for its currency, it should behave properly, and that isn’t the case today,” Glazyev said.

And this is how Putin sees the world. De-escalation? Good luck.


Make sure to switch on subtitles in YouTube (below clip)

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Strong Earthquakes Shake Icelandic Volcano On Red Alert (AFP)

Two strong earthquakes on Sunday, August 24, shook Iceland’s largest volcano, which is on red alert for imminent risk of eruption, the Icelandic Met Office said. A large explosion at the Bardarbunga volcano could signal a replay of the global travel chaos caused by the eruption of another Icelandic peak four years ago, which created a massive ash cloud across Europe. The earthquakes were listed on the Met Office’s website with intensities of 5.3 and 5.1 on the Richter scale, which makes them the strongest recorded in the region since the current seismic cycle began last week. On Saturday, August 23, Iceland raised its alert over the Bardarbunga volcano to the highest level and closed airspace in the area, but all of Iceland’s airports remained open.

Met Office official Gunnar Gudmundsson told Icelandic public broadcaster RUV that it was difficult to say whether the earthquakes indicated an increased risk of an eruption. Earlier this week, authorities evacuated tourists and hikers from the area around the volcano, which is covered by a glacier. Seismologists had recorded an earthquake of 4.5 in the Richter scale on Monday, when Iceland decided to raise its aviation alert to orange, the second-highest level of five. The eruption of Eyjafjoell, a smaller volcano, in April 2010 caused travel mayhem, stranding more than eight million people in the widest airspace shutdown since World War II.Iceland’s most active sub-glacial volcano Grimsvotn erupted in 2011, forcing the country to temporarily shut its airspace and sparking fears of a repeat of the Eyjafjoell flight chaos.

Read more …

‘Incredible’ Rate Of Polar Ice Loss Alarms Scientists (Guardian)

The planet’s two largest ice sheets – in Greenland and Antarctica – are now being depleted at an astonishing rate of 120 cubic miles each year. That is the discovery made by scientists using data from CryoSat-2, the European probe that has been measuring the thickness of Earth’s ice sheets and glaciers since it was launched by the European Space Agency in 2010. Even more alarming, the rate of loss of ice from the two regions has more than doubled since 2009, revealing the dramatic impact that climate change is beginning to have on our world. The researchers, based at Germany’s Alfred Wegener Institute Helmholtz Centre for Polar and Marine Research – used 200m data points across Antarctica and 14.3m across Greenland, all collected by CryoSat, to study how the ice sheets there had changed over the past three years. The satellite carries a high-precision altimeter, which sends out short radar pulses that bounce off the ice surface and then back to the satellite. By measuring the time this takes, the height of the ice beneath the spacecraft can be calculated.

It was found from the average drops in elevation that were detected by CryoSat that Greenland alone is losing about 90 cubic miles a year, while in Antarctica the annual volume loss is about 30 cubic miles. These rates of loss – described as “incredible” by one researcher – are the highest observed since altimetry satellite records began about 20 years ago, and they mean that the ice sheets’ annual contribution to sea-level rise has doubled since 2009, say the researchers whose work was published in the journal Cryosphere last week. “We have found that, since 2009, the volume loss in Greenland has increased by a factor of about two, and the West Antarctic ice sheet by a factor of three,” said glaciologist Angelika Humbert, one of the study’s authors. “Both the West Antarctic ice sheet and the Antarctic peninsula, in the far west, are rapidly losing volume. By contrast, East Antarctica is gaining volume, though at a moderate rate that doesn’t compensate for the losses on the other side of the continent.”

The researchers say they detected the biggest elevation changes caused by ice loss at the Jakobshavn glacier in Greenland, which was recently found to be shifting ice into the oceans faster than any other ice-sheet glacier, and at Pine Island glacier, which like other glaciers in West Antarctica, has been thinning rapidly in recent years.

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Aug 182014
 
 August 18, 2014  Posted by at 8:48 pm Finance Tagged with: , , ,  16 Responses »


Marjory Collins Gasoline rationing in Mechanicsville, Maryland Jul 1942

When first we practise to deceive!

The upper echelons in and behind various governments have had on their radar far longer than the media that serve them, and I also realize that Washington wants a leading role in that battle, but even then I still don’t really get what is going on these days.

I think perhaps that’s because I tend to give the American political machine too much credit when it comes to intelligence and insight and other qualities its managerial staff doesn’t exactly seem to be drowning in. But still. I get the idea that most of what Washington does is based on what someone I read today calls ‘solution selling’, and what I know as ‘the completion backward principle’.

Both marketing terms mean you create a problem – a.k.a. a market – first, and then sell your products into the hole you just created. Perhaps that comes closest to what I see America doing these days, and if I’m right in that assessment, I can guarantee massive failure. Or maybe I should say massive warfare, which for me would be a failure, but not necessarily for the Pennsylvania Avenue apparatchiks.

The result is that stock markets keep rising, and oil prices keep falling, while the US actively involves itself in various hornets nests directly linked to various energy resources, involvements it doesn’t exactly have a stellar record in over the past 25 years- if not much longer -. Stocks are up only on central bank largesse, and oil is down only because people have faith in US military might. The latter is a big mistake all by itself, but both are for sure hugely risky notions, which tells me when a blow comes many investors will be taken off guard.

But let’s some other people talk. First, Ron Paul, that very rare sound voice:

What Have We Accomplished in Iraq?

We have been at war with Iraq for 24 years. Shortly after Iraq’s invasion of Kuwait that year, the propaganda machine began agitating for a US attack on Iraq. We all remember the appearance before Congress of a young Kuwaiti woman claiming that the Iraqis were ripping Kuwaiti babies from incubators. The woman turned out to be the daughter of the Kuwaiti ambassador to the US and the story was false [..]

The second Iraq war in 2003 cost the US some $2 trillion. According to estimates, more than one million deaths have occurred as a result of that war. What have we accomplished? Where are we now, 24 years later? We are back where we started, at war in Iraq!

The US overthrew Saddam Hussein in the second Iraq war and put into place a puppet, Nouri al-Maliki. But after eight years, last week the US engineered a coup against Maliki to put in place yet another puppet. [..] … what really irritated the US government was his 2011 refusal to grant immunity to thousands of US troops …

Hm. Perhaps what really really irritated the US government was that al-Maliki demanded better deals for Iraq in negotiations with western oil companies operating in the country.

Early this year, a radical Islamist group, ISIS, began taking over territory in Iraq. The organization had been operating in Syria, strengthened by US support for the overthrow of the Syrian government. ISIS obtained a broad array of sophisticated US weapons in Syria, very often capturing them from other US-approved opposition groups. Some claim that lax screening criteria allowed some ISIS fighters to even participate in secret CIA training camps in Jordan and Turkey.

This month, ISIS became the target of a new US bombing campaign in Iraq. The pretext for the latest US attack was the plight of a religious minority in the Kurdish region currently under ISIS attack. The US government and media warned that up to 100,000 from this group, including some 40,000 stranded on a mountain, could be slaughtered if the US did not intervene at once.

US bombs began to fall. Last week, however, it was determined that only about 2,000 were on the mountain and many of them had been living there for years! They didn’t want to be rescued!

The humanitarian situation was cynically manipulated by the Obama administration – and echoed by the US media – to provide a reason for the president to attack Iraq again. This time it was about yet another regime change, breaking Kurdistan away from Iraq and protection of the rich oil reserves there, and acceptance of a new US military presence on the ground in the country.

President Obama has started another war in Iraq and Congress is completely silent. No declaration, no authorization, not even a debate. After 24 years we are back where we started.

Then, Eric Draitser:

‘Islamist State A Pretext For US-Sponsored Regime Change In Iraq’

The ousting of Iraqi Prime Minister Nouri al-Maliki is part of a broader US plan for Iraq and the Middle East as a whole. Against the backdrop of the war against the Islamic State, Washington has managed to kill two birds with one stone. Not only has the US removed a political leader who had proven to be problematic due to his opposition to US military presence in Iraq, as well as his staunch support for Syria and President Assad, they have also created the conditions for the dismemberment of the Iraqi state.

The US and its allies are supporting de facto ‘independence’ for the Kurdish region in the north of the country, using the IS as a convenient pretext for openly arming and supporting Kurdish forces. Naturally, one should not look for altruism in Washington’s motives. Rather, this strategy is to benefit western oil companies with dollar signs in their eyes, licking their lips in anticipation of being able to deal directly with Kurdish President Barzani. Additionally, Maliki’s ouster deprives Syrian President Assad of a key ally, thereby emboldening the IS and the other militants waging war against Syria. It provides further evidence, as if more were needed, that the political future is bleak for any Iraqi leader who dares to break from the script written for him by Washington.

Perhaps most importantly, it allows the US and its allies to be the leading force politically in the war against the IS, an organization created by US policy and covert operations in the region. In the sales and marketing industry, there is a term known as ‘solution selling’ whereby the salesperson either creates or exaggerates a problem, then presents his or her product as the invaluable solution.

[..] [Al-Maliki] also challenged Western oil companies looking to make massive profits off of Iraq’s vast energy deposits. Perhaps the best-known instance occurred in 2012 when ExxonMobil signed an oil exploration deal with the semi-autonomous Kurdistan region in northern Iraq. Maliki rejected the validity of the deal, noting that any oil contracts must be negotiated with the central government in Baghdad, rather than Barzani’s US-aligned government in Arbil. Maliki’s spokesman noted at the time that:

“Maliki views these deals as representing a very dangerous initiative that may lead to the outbreak of wars… [and] breaking up the unity of Iraq…Maliki is prepared to go to the highest levels for the sake of preserving the national wealth and the necessary transparency in investing the wealth of the Iraqis, especially oil… [He] sent a message to American President Barak [sic] Obama last week urging him to intervene to prevent ExxonMobil from going in this direction.”

It is no secret that Maliki’s strong-willed resistance to this deal, in addition to his refusal to pay ExxonMobil upwards of $50 million to improve production at one major southern oilfield led directly to the oil company pulling out of the lucrative West Qurna-1 project. Essentially then, Maliki took on the very powerful oil corporations (BP is no friend of Maliki either), seeking to get a better deal for Iraq.

The US should, and could, have taken care of business in Iraq at any point since 1990. It didn’t. And it’s hard for me to accept that it never wanted to. It’s much more likely that hubris got in the way, that there was the idea all along that it never had to know all the ins and outs of the territory to be invaded. That having the biggest guns is always enough in the end. And now it’s clear that that didn’t work the last few times around, and what do you think the ‘new approach’ is? Right, more of the same.

There are scores of groups and militias and private armies and factions and fractions the US supported with billions in cash and training and guns and talks in Iraq alone, and it looks like more often than not it ends up fighting its own arms. The Kurds are the latest fad, but don’t underestimate their hatred of Turkey, which also happens to be a US ally. Who to choose when they restart their feud?

A very similar story, just on a smaller scale, is playing out with regards to American meddling in Ukraine. Really, what are they thinking? And what is Europe thinking? This could throw it back 50 years in time, before you know it someone start building a wall. RT:

Far-Right Right Sector Threatens Armed March On Kiev

The far-right Ukrainian group Right Sector has threatened its armed forces will raid Kiev unless authorities release all its members and end all criminal investigations against them. They accused the police of being “anti-Ukrainian.” Right Sector also accused the Interior Ministry of “unlawful detentions, arrests, beatings, confiscation of arms taken in battle” in moves targeting dozens of fighters of Right Sector’s volunteer battalion, which was formed with the stated goal of fighting armed militias in the east of the country.

The far-right group called on President Petro Poroshenko to fire Yevdokimov and his men from the service and investigate them for “their criminal activities.” As for detained members of Right Sector, all of them should be released and criminal cases launched against them must be closed, Yarosh demanded. “Unless our demands are met within 48 hours, we will be forced to call off all our units on the front line, start a general mobilization of reserve battalions and launch a march on Kiev to enact a ‘swift reform’ of the Interior Ministry. The columns of the Right Sector will march in full gear.”

A handful of billionaires with private armies who pay all sorts of people on the side who happen to want what they want, and wave swastika banners. That’s the western side of this conflict. That’s us.

‘West Has More Influence Than Kiev On Private Armies In Ukraine’

Moscow believes the West has more influence on various paramilitary forces in Ukraine – sponsored by local oligarchs – than Kiev does, the Russian FM said citing the latest bickering between Right Sector and the Interior Ministry. “The authorities in Kiev are not in control of the numerous paramilitary forces, including Right Sector, which, we estimate, comprises a large portion of the National Guard.

The march of Right Sector towards the Ukrainian Interior Minister speaks for itself,” Sergey Lavrov said, adding that the existence of armed groups sponsored by Ukrainian oligarchs, such as the Azov and Dnepr battalions, poses a great security threat. “We work with our Western partners in Europe and the United States who can really influence those paramilitary units that don’t answer to the central government in Kiev. We know the West has such influence,” he added.

Lavrov was referring to the weekend ultimatum of the far-right group, which threatened to pull out its troops from eastern Ukraine and march on Kiev unless President Petro Poroshenko fires several police officials, including a deputy interior minister. The group later reduced its demands, saying that the release of its activists previously arrested by the police was sufficient. [..]

Lavrov cited the latest claim by Kiev on Friday, when the Ukrainian military said it had destroyed a column of Russian armor after an incursion into Ukraine.“What really happened was a Ukrainian column moved in the Lugansk Region, obviously to intercept the rout of a potential humanitarian aid delivery. That column was destroyed by the militia,”he said. “If such episodes are presented as glorious successes of the Ukrainian army, then please don’t accuse us of anything.”

And then, what is the US doing at home? According to multiple media reports, there were all of 200 protesters on the streets of Ferguson last night. Police were firing teargas and rubber bullets into that ‘crowd’ even before the curfew. And it looked like the army had invaded. Armored personnel carriers and all.

And even that was not enough against 200 people who were simply pissed off because a cop emptied his gun, 6 bullets were found in the body alone, into an unarmed kid. 200 people, most of whom only wanted to protest. That there are a few dozen among them who are armed and/or looking for trouble is to be expected. So you pick them out of the crowd and cool things down. Right?

Does nobody in the States know anything about crowd control anymore? Or is this an attempt to make a small incident grow into something much bigger, so Americans get used to seeing the National Guard in their streets? I don’t know, but I look at all these things, and I wonder what’s going on.

As I said yesterday, you could be forgiven for thinking that America went looking for trouble.

What Have We Accomplished in Iraq? (Ron Paul)

We have been at war with Iraq for 24 years, starting with Operations Desert Shield and Storm in 1990. Shortly after Iraq’s invasion of Kuwait that year, the propaganda machine began agitating for a US attack on Iraq. We all remember the appearance before Congress of a young Kuwaiti woman claiming that the Iraqis were ripping Kuwaiti babies from incubators. The woman turned out to be the daughter of the Kuwaiti ambassador to the US and the story was false, but it was enough to turn US opposition in favor of an attack. This month, yet another US president – the fourth in a row – began bombing Iraq. He is also placing US troops on the ground despite promising not to do so. The second Iraq war in 2003 cost the US some two trillion dollars. According to estimates, more than one million deaths have occurred as a result of that war. Millions of tons of US bombs have fallen in Iraq almost steadily since 1991. What have we accomplished? Where are we now, 24 years later? We are back where we started, at war in Iraq!

The US overthrew Saddam Hussein in the second Iraq war and put into place a puppet, Nouri al-Maliki. But after eight years, last week the US engineered a coup against Maliki to put in place yet another puppet. The US accused Maliki of misrule and divisiveness, but what really irritated the US government was his 2011 refusal to grant immunity to the thousands of US troops that Obama wanted to keep in the country. Early this year, a radical Islamist group, ISIS, began taking over territory in Iraq, starting with Fallujah. The organization had been operating in Syria, strengthened by US support for the overthrow of the Syrian government. ISIS obtained a broad array of sophisticated US weapons in Syria, very often capturing them from other US-approved opposition groups. Some claim that lax screening criteria allowed some ISIS fighters to even participate in secret CIA training camps in Jordan and Turkey.

This month, ISIS became the target of a new US bombing campaign in Iraq. The pretext for the latest US attack was the plight of a religious minority in the Kurdish region currently under ISIS attack. The US government and media warned that up to 100,000 from this group, including some 40,000 stranded on a mountain, could be slaughtered if the US did not intervene at once. Americans unfortunately once again fell for this propaganda and US bombs began to fall. Last week, however, it was determined that only about 2,000 were on the mountain and many of them had been living there for years! They didn’t want to be rescued!

Read more …

‘Islamist State A Pretext For US-Sponsored Regime Change In Iraq’ (RT)

The ousting of Iraqi Prime Minister Nouri al-Maliki is part of a broader US plan for Iraq and the Middle East as a whole. Against the backdrop of the war against the Islamic State (IS, formerly ISIS/ISIL), Washington has managed to kill two birds with one stone, as the saying goes. Not only has the US removed a political leader who had proven to be problematic due to his opposition to US military presence in Iraq, as well as his staunch support for Syria and President Assad, they have also created the conditions for the dismemberment of the Iraqi state. The US and its allies are supporting de facto ‘independence’ for the Kurdish region in the north of the country, using the IS as a convenient pretext for openly arming and supporting Kurdish forces. Naturally, one should not look for altruism in Washington’s motives. Rather, this strategy is to benefit western oil companies with dollar signs in their eyes, licking their lips in anticipation of being able to deal directly with Kurdish President Barzani.

Additionally, Maliki’s ouster deprives Syrian President Assad of a key ally, thereby emboldening the IS and the other militants waging war against Syria. It provides further evidence, as if more were needed, that the political future is bleak for any Iraqi leader who dares to break from the script written for him by Washington. Perhaps most importantly, it allows the US and its allies to be the leading force politically in the war against the IS, an organization created by US policy and covert operations in the region. In the sales and marketing industry, there is a term known as ‘solution selling’ whereby the salesperson either creates or exaggerates a problem, then presents his or her product as the invaluable solution. Indeed, this sort of sales strategy is precisely the approach Washington has taken in the region, and specifically in Iraq.

The IS has only very recently become an internationally recognized epidemic of militant Islamist extremism that must be eradicated at all costs. That international recognition came only when the organization began taking control of territory in Iraq, threatening Western oil and gas interests. While the IS was waging its brutal and vicious war against the Syrian people and government however, the IS was merely an afterthought, simply a group of extremists fighting the ‘brutal dictator’ Assad. It seems then that the danger of ISIS and the necessity to eradicate it is directly correlative to US interests. Put another way, the IS is a useful tool in Syria and southern Lebanon where it creates chaos to the detriment of Assad and Hezbollah respectively, while in Iraq, the IS is dangerous where it threatens the US client regime in Kurdistan and Western oil interests. But of course, the detail consistently left out of most analysis of the IS problem is the simple fact that it is a creation of US intelligence and its covert war on Syria.

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Far-Right Right Sector Threatens Armed March On Kiev (RT)

The far-right Ukrainian group Right Sector has threatened its armed forces will raid Kiev unless authorities release all its members and end all criminal investigations against them. They accused the police of being “anti-Ukrainian.” In a statement published on Right Sector’s website, the group’s leader, Dmitro Yarosh, and the commander of the its volunteer battalion, Andrey Stempitsky, accused Deputy Interior Minister General Vladimir Yevdokimov of heading “a criminal police group of separatist stooges and a Moscow puppet.” Right Sector also accused the Interior Ministry of “unlawful detentions, arrests, beatings, confiscation of arms taken in battle” in moves targeting dozens of fighters of Right Sector’s volunteer battalion, which was formed with the stated goal of fighting armed militias in the east of the country.

The far-right group called on President Petro Poroshenko to fire Yevdokimov and his men from the service and investigate them for “their criminal activities.” As for detained members of Right Sector, all of them should be released and criminal cases launched against them must be closed, Yarosh demanded. “Unless our demands are met within 48 hours, we will be forced to call off all our units on the front line, start a general mobilization of reserve battalions and launch a march on Kiev to enact a ‘swift reform’ of the Interior Ministry. The columns of the Right Sector will march in full gear,” the statement said.

Read more …

‘West Has More Influence Than Kiev On Private Armies In Ukraine’ (RT)

Moscow believes the West has more influence on various paramilitary forces in Ukraine – sponsored by local oligarchs – than Kiev does, Russian FM said citing the latest bickering between Right Sector and the Interior Ministry. “The authorities in Kiev are not in control of the numerous paramilitary forces, including Right Sector, which, we estimate, comprises a large portion of the National Guard. The demarche of Right Sector towards the Ukrainian Interior Minister speaks for itself,” Sergey Lavrov said, adding that existence of armed groups sponsored by Ukrainian oligarchs, such as the Azov and Dnepr battalions, poses a great security threat. “We work with our Western partners in Europe and the United States who can really influence those paramilitary units that don’t answer to the central government in Kiev. We know the West has such influence,” he added.

Lavrov was referring to the weekend ultimatum of the far-right group, which threatened to pull out its troops from eastern Ukraine and march on Kiev unless President Petro Poroshenko fires several police officials, including a deputy interior minister. The group later reduced its demands, saying that the release of its activists previously arrested by the police was sufficient. The comments from the top Russian diplomat came as he reported on the progress achieved during the Sunday meeting with his counterparts from Ukraine, Germany and France. The roundtable produced no concrete agreements, but the parties involved said some progress was made on the issues of humanitarian aid and border control. Speaking to journalists on Monday, Lavrov said Moscow would welcome the observer mission of the Organization for Security and Cooperation in Europe (OSCE) deploying drones to control the Russian-Ukrainian border from the Ukrainian side.

Lavrov said Russia is working with the OSCE on giving more transparency in the border region, which is important, considering how often Kiev voices false reports on alleged violation of the border from the Russian side. He cited the latest claim by Kiev on Friday, when the Ukrainian military said it had destroyed a column of Russian armor after an incursion into Ukraine.“What really happened was a Ukrainian column moved in the Lugansk Region, obviously to intercept the rout of a potential humanitarian aid delivery. That column was destroyed by the militia,”he said. “If such episodes are presented as glorious successes of the Ukrainian army, then please don’t accuse us of anything.”

Read more …

Autopsy Finds Unarmed Teen Killed By Police Shot At Least 6 Times (Reuters)

A preliminary private autopsy report found that Michael Brown, the black teen killed by a police officer in the suburban St. Louis city of Ferguson, was shot at least six times, the New York Times reported on Sunday night. Citing Dr. Michael M. Baden, former chief medical examiner for the City of New York who was asked to perform the autopsy by Brown’s family, the newspaper reported that Brown, 18, was shot twice in the head, and that the bullets that hit him did not appear to have been fired from very close range. Four shots hit Brown in his right arm and one entered the top of his skull, the Times said, citing findings by Baden, who it said flew to Missouri on Sunday at the family’s behest and waived his usual fee in view of the extraordinary circumstances. The bullets, some of which left as many as five wounds, did not appear to have been fired from very close range, the Times reported, because no gunpowder was detected on his body. That conclusion could change, however, if gunshot residue is found on Brown’s clothing, the newspaper said.

[..] “People have been asking: How many times was he shot? This information could have been released on Day 1,” Baden told the Times in an interview after performing the autopsy. “They don’t do that, even as feelings built up among the citizenry that there was a cover-up. We are hoping to alleviate that,” the newspaper quoted him as saying. Baden said his autopsy was not intended to determine whether the shooting was justified. “In my capacity as the forensic examiner for the New York State Police, I would say, ‘You’re not supposed to shoot so many times’,” he told the Times. “Right now there is too little information to forensically reconstruct the shooting.”

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Russia Widens Ruble Basket to Complete Free Float by End of Year (Bloomberg)

Russia is making its currency more flexible by widening the range in which it trades freely and reducing the amount of foreign exchange bought and sold by the central bank. Russia widened the band in which the ruble trades against the target basket of dollars and euros to 9 rubles from 7 rubles previously, the central bank in Moscow said in a website statement. The regulator also abandoned all interventions while the ruble is trading in the band. It used to buy or sell $200 million per day at certain levels. The changes are intended to help complete the switch to a freely floating ruble from the current managed rate by the end of this year, which is needed to shift to inflation targeting, the central bank said. Policy makers are loosening their hold on the ruble even as volatility rises and inflation risks increase because of Ukraine-related sanctions. “This decision will not have a significant impact on current ruble fluctuations,” because the currency is trading in the neutral zone, the central bank said in the statement.

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The Biggest Economic Risk? You May Be Living In It (CNBC)

As a spate of housing data are released in the coming week, Wall Street will attempt to answer a burning question: Is the housing market becoming a big drag on economic growth? “We are laser-focused on this housing data coming out, because we have seen that the backbone of the recovery was housing. Now it’s faltering slightly. So if we see another mishap here, maybe that adds to the slowing global growth—especially domestically,” said Jeff Kilburg, chief executive of KKM Financial. The data start to emerge on Monday morning, when the National Association of Home Builders releases the latest reading on its housing market sentiment index. That widely watched gauge of the housing market rose to a six-month high in July, but is still down on the year. On Tuesday, the all-important housing starts number will reveal how many residential buildings began construction in July. The July number will follow a big disappointment from June, when 893,000 homes were started on a seasonally adjusted annualized basis—a nine-month low.

Thursday’s existing home sales data will round out the week. Recent indicators have not squelched concerns about housing. On Wednesday, the Mortgage Bankers Association reported applications to buy a house fell to a six-month low in the week prior. Still, there are some reasons for optimism. According to Freddie Mac, 30-year mortgage rates have fallen to just 4.12%, which brings it back to its lowest levels on the year. Given the decline in interest rates, as well as this year’s impressive employment growth, “I would have expected more out of housing,” said Stuart Hoffman, chief economist at PNC Financial Services. The weak housing market “is a disappointment, and somewhat of a downside risk to the economy. But with mortgage rates coming down and credit standards loosening, I would expect housing to have a better second half of the year.”

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London Home Asking Prices Plunge Most in More Than Six Years (Bloomberg)

London home sellers cut asking prices by the most in more than six years this month, adding to signs that the property market in the U.K. capital is coming off the boil. London values fell 5.9% from the previous month to an average £552,783 ($922,300), the biggest drop since December 2007, property website Rightmove Plc said today. Nationally, prices declined 2.9%, a record for an August. While property demand usually weakens during the summer, Rightmove said the slump this year was steeper than it expected. Tougher new mortgage rules introduced by Bank of England Governor Mark Carney, as well as anticipation of higher interest rates, are putting pressure on the market after a surge in values raised concerns that a bubble may develop. “Buyers and sellers are becoming increasingly aware about personal finances, given that the cost of mortgages are going up and regulators are trying to bring availability down,” said Miles Shipside, a director at Rightmove. “This limits what buyers are willing or able to pay, and helps moderate sellers’ price expectations.”

Some of the biggest price declines in London were recorded in affluent boroughs including Kensington and Chelsea, Camden, Hammersmith and Fulham, according to the report. Among the “million-pound plus” districts, Kensington saw asking prices drop 7% on the month to an average £2.2 million, while Camden fell 7.2%. From a year earlier, values in Kensington were down 1.4%, the only borough recording an annual decline. The average London price is up 10.3% in that period. “Top-end sellers are very much discretionary ones, so can delay marketing till a more active time of year,” Shipside said. “That tends to depress property prices more in the higher-priced boroughs.” Nationally, the annual pace of growth in prices slowed to 5.3% in August from 6.5% in July. The average asking price was £262,401. Rightmove said the drop in monthly prices is a “lead indicator of a slower market in the second half.”

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US Mortgage Market Continues To Falter: Q2 Originations Down 59% (Alhambra)

The Mortgage Bankers Association’s refi index is at a level not seen in a very long time, far lower than anything of this “recovery” period. There has been a clear disassociation of refi activity and interest rates, which is itself a clear break from the close correlation of the prior paradigm (before taper threats). That is a woeful sign for consumerism, as even though the trickle of refis likely had a relatively muted impact on the monetary goal of spending, it will now be completely reversed going forward – regardless of interest rates it appears. In terms of real estate and new home construction or home sales, purchasing activity has been far less provoked by all of this but no less in terms of direction.

Mortgage applications for home purchases are running nearly 15% below year ago levels, and this despite that favorable direction in mortgage rates. At the three largest mortgage providers, there was some increase in originations and volume in the second quarter over the first, but nothing that would indicate a sharp reversal on the horizon. Where total mortgage lending volume at these three banks was off by two-thirds Y/Y in Q1, in Q2 the decimation was only 59%. We will have to see about how that plays out in Q3, though mortgage pipelines entering the quarter were still way down vs. last year’s levels (about 65% on average). The current view of applications doesn’t bode well for it.

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Yellen Dashboard Warning Light Glows as Millions Work Part Time (Bloomberg)

Federal Reserve Chair Janet Yellen has a stubborn warning light blinking on her labor market dashboard: A group of Americans larger than Washington state’s population can find only part-time work. As Yellen heads to this week’s Fed symposium in Jackson Hole, Wyoming, where the focus will be on the labor market, those 7.5 million part-time workers who want full-time jobs are inflating the broad measure of underemployment she watches to gauge job market health. Involuntary part-time workers have gained by 325,000 from February’s five-year low. With employment and inflation nearing Fed goals, Yellen has consistently cautioned some labor market measures still show enough slack to warrant keeping interest rates low.

In the shadow of the Teton Range of the Rocky Mountains, she’ll have a chance to highlight soft spots such as the crowded pool of part-timers as investors try to decipher the timing of the Fed’s first rate increase-rate increase since 2006. “We still have quite a long ways to go,” said Aneta Markowska, chief U.S. economist at Societe Generale SA in New York. In the discussion of monetary policy, “I’d be surprised if the message is anything other than dovish.” Yellen, 68, is delivering a speech titled “Labor Markets” at the Jackson Hole symposium Aug. 22 at 10 a.m. New York time. The three-day meeting of central bankers and economists begins Aug. 21 with a topic of “Re-evaluating Labor Market Dynamics.”

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China’s July Home Sales Fall 28% as Easing Yet to Boost Demand (Bloomberg)

China’s home sales fell 28% in July, the biggest monthly decline this year, as tight mortgage lending outweighed efforts by local governments to ease property curbs as prices and demand weakened. The value of homes sold fell to 424.2 billion yuan ($69 billion) last month from 591.2 billion yuan in June, according to the difference between the National Statistics Bureau’s data for the first seven months and the first half of the year. The value of sales in the first seven months fell 10.5% to 2.99 trillion yuan from a year earlier, the data showed. “Today’s data will hurt sentiment as the property market has no fundamental recovery yet as investors imagined,” Edison Bian, a Hong Kong-based property analyst at UOB Kay Hian Ltd., said in a phone interview today. “Developers are still very cautious even as local governments are easing policies. Mortgages should ease further, so that reluctant developers will supply more homes.”

Chinese cities began relaxing local property restrictions in June amid sluggish sales and as an oversupply in second- and third-tier cities drove prices lower. Thirty-six Chinese cities eased their policies as of the end of last week, Centaline Property Agency Ltd., China’s biggest real estate broker, said in a report. While more cities are set to follow, buyers remain hesitant as the central bank maintains mortgage restrictions, according to Centaline. In Beijing and Shanghai, first-home mortgage rates were the same as the benchmark rate in July, while in the southern business hub of Guangzhou they were 5% to 10% higher than the benchmark rate, Centaline said.

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China Home Prices Fall in Majority of Cities on Weak Demand (Bloomberg)

China’s new-home prices fell in July in almost all cities that the government tracks as tight mortgage lending deterred buyers even as local governments eased property curbs. Prices fell in 64 of the 70 cities last month from June, the National Bureau of Statistics said today, the most since January 2011 when the government changed the way it compiles the data. Beijing prices fell 1% from June, posting the first monthly decline since April 2012. “The falling trend of China’s property market has no sign of improving,” Shen Jian-guang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd., said in a phone interview today. “The key issue is the mortgages, despite all types of local government easings. The high rate is damping sentiment of owner occupiers.”

China’s property market has become a drag on the world’s second-biggest economy, prompting cities to start easing local curbs in June. Thirty-six cities had loosened measures as of the end of last week, according to Centaline Property Agency Ltd., while developers have cut prices since March to lure buyers. The International Monetary Fund has urged China to target slower expansion in 2015, saying the economy faces a “web of vulnerabilities” from rising debt and financial institutions’ exposure to real estate. [..] Worse times for China’s real estate sector are still ahead, wrote Standard Chartered Plc economists led by Lan Shen in an Aug. 6 report, after surveying managers of 30 Chinese developers in six cities. Developers are offering “moderate discounts,” while buyers are still very cautious regardless of how much developers cut prices, Standard Chartered found.

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Blow To Global Banks’ Living Wills Over Fed’s Lending Window (FT)

Global banks can no longer assume continuing access to the Federal Reserve’s discount lending window as an element of their living wills, people familiar with the process have warned. US regulators set out the specific guidance in confidential letters on August 5 detailing why they recently rejected the living wills of the world’s largest banks. Hundreds of banks took advantage of the discount lending window on multiple occasions during the 2008 credit crunch. Critics say that instead of creating an environment for an orderly resolution that would avoid the kind of panic that ensued after the failure of Lehman Brothers, regulators are creating more risk by making a bank’s failure theoretically inevitable. They added that the prohibition defeats the purpose of the discount window and the role of the Fed as the lender of last resort.

“How are you supposed to write these living wills if the assumptions regulators are making are false and inaccurate?” asked one UScommentator. “They are disconnected from what would happen in the real world.” But the Fed and the Federal Deposit Insurance Corporation, which are under pressure to avoid government bailouts in any future crisis, want to force the banks to come up with emergency plans that do not involve any government aid, even when it comes to the discount window, which is available only to banks that are in trouble rather than failing. For the 2013 living wills, 11 banks ranging from Citigroup to Barclays were told they made unrealistic assumptions about how customers, counterparties and investors would behave in a crisis. In addition, they were informed that they failed to make or identify the kinds of structural changes that would be needed to ensure an orderly resolution.

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US Banks Plan Ahead For UK Exit From EU (FT)

Wall Street banks are drawing up preliminary plans to move some London-based activities to Ireland to address concerns that the UK is drifting apart from the EU People familiar with Bank of America, Citigroup and Morgan Stanley told the Financial Times that they considered Ireland a favorable location for some of their European business if they needed to move them out of the UK. One said he was already planning to move some activities to Ireland. The people said their plans were in most cases still at very early stages. But they said the US banks had started preparing for the euro zone’s impending banking union that threatens to isolate Britain and, ultimately, for a possible UK exit from the EU. “I’m frankly looking at moving some activities to Ireland,” said one senior UK-based manager at a Wall Street bank. “I think the Irish central bank and government would welcome this. It is not so much Brexit, more about legal entity optimization.”

Most US and Asian banks have chosen to base their main European operations in the UK, giving them an automatic passport to carry out their services across all 28 countries in the EU. But senior US banking executives said the UK was unlikely to be granted the same “passporting” rights if it left the EU – the so-called “Brexit” scenario. Prime Minister David Cameron has promised to hold a referendum on a renegotiated EU membership if his Conservative party wins next May’s election. Executives at American banks in Europe are reluctant to speak publicly about the issue for fear of upsetting the UK regulators. One said: “I don’t think people are making enough of it – a lot of passported activities that cannot take place in London will not exist here any more.” As the European Central Bank prepares to take charge of the biggest banks in the euro zone later this year, there are fears among some executives at US banks that this will drive a wedge between the UK and the rest of Europe’s financial system.

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Great teachers!

EU Trains for Bank Closures With US Agency That Shuttered 500 (Bloomberg)

When a bank fails, regulators need two qualities above all: Speed and agility. That’s the message U.S. Federal Deposit Insurance Corp. officials are sending to their colleagues in Brussels working out how the European Union will shut down insolvent lenders. Regulators need to move fast enough to limit disruption to the financial system, while staying nimble so they can pull back at the last minute if another solution emerges, Pamela Farwig, deputy director of the FDIC’s resolution and receivership division, said in a phone interview this month. “If you had to tell them to stand down, you must be able to do that in very, very short order,” said Farwig, one of four U.S. officials who spoke at private workshop on bank closures with EU officials in June.

The FDIC’s practical tips and advice for Europe are borne of hard-won experience: it handled more than 500 bank closures during the financial crisis. Its seminar, part of a trans-Atlantic exchange, tackled issues like how to market a failing bank, and how to sneak up and close it on a Friday night. “They were surprised at some of the things that can happen at the very last minute,” she said. “They just have not had that experience yet.” When a lender is on the brink, the FDIC needs to fly under the radar to avoid roiling the markets or alarming depositors. Officials will try to line up a buyer in advance and then they even book hotel rooms and rental cars without mentioning the agency’s name. “You have a team going into a very small town where everyone knows everyone — when they see those different cars you have to be very careful,” Farwig said. “The last thing you want is a marquee that says ‘Welcome FDIC.’”

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Australia Misery Index Rises to Highest Level Since 2008 (Bloomberg)

A deepening gloom across the largest developed economy to escape recession during the global financial crisis is shaping up as one of the toughest challenges yet for Reserve Bank of Australia chief Glenn Stevens. Australia’s misery index – the sum of unemployment and inflation rates – is at 9.0, the highest since 2008, when the collapse of Lehman Brothers Holdings Inc. froze credit markets around the world and triggered the deepest recession in the U.S. since the Great Depression.

While policy makers from the U.S. Federal Reserve to the European Central Bank are still pumping stimulus into their economies at least in part to address job-market slack, Australia’s price pressures limit that option for the RBA. The upshot for the nation’s businesses and consumers: little prospect of lower borrowing costs from Stevens. “The hurdle to cut further is high,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “The RBA is likely to remain reluctant in the absence of an external driver, and the case to cut from an already historical low will need to be compelling.”

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Credit Suisse Caught Up in Espírito Santo Mess (WSJ)

Credit Suisse helped sell billions of dollars of securities that ultimately played a role in toppling Portugal’s second-largest bank. The Swiss bank was responsible for putting together securities that were issued by offshore investment vehicles and then sold to retail customers of Portugal’s Banco Espírito Santo SA. Many customers didn’t realize that these vehicles were loaded with debt issued by various Espírito Santo companies and apparently served as a mechanism to finance the family-controlled empire, according to corporate filings and people familiar with Portugal’s investigation into the Espírito Santo affair. It is unclear what, if any, direct role Credit Suisse had in selling the securities to bank customers. Now those investment products are at the center of an unfolding scandal. Banco Espírito Santo was bailed out and broken up this month. Other parts of the Espírito Santo group have filed for bankruptcy amid alleged fraud and accounting problems. In addition to sinking the Portuguese stock market, the episode has undermined confidence in the European banking sector, analysts say.

Portuguese regulators investigating the Espírito Santo mess have identified at least four offshore investment vehicles whose securities, mostly preferred shares, were sold with the help of Credit Suisse to Banco Espírito Santo customers. Portuguese regulators, who received complaints about the products from customers who didn’t understand what they were buying, are now making the bank buy back the securities. That caused crippling losses for the bank. The offshore vehicles used at least some of the proceeds from selling the securities to buy more Espírito Santo debt, according to corporate filings. Regulators suspect the sales were part of an effort to prop up the bank and other Espírito Santo companies, the people say. Three of the vehicles are based in Jersey, an island tax haven off France’s northern coast. Credit Suisse served as “arranger and dealer” for those three vehicles, a role that included not just underwriting securities but also handling administrative and financial needs, according to corporate records filed with the Jersey Financial Services Commission.

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China’s First Bond Default in Focus as Debtholders Meet (Bloomberg)

Holders of China’s first corporate bond to default onshore plan to meet today in Shanghai, as investors look for clues on how the government will balance market liberalization with steps to maintain stability. Investors in notes of Shanghai Chaori will gather this afternoon as they seek repayment, Vice President Liu Tielong said by phone. Shanghai marked a milestone in corporate bankruptcy in June when a court accepted a restructuring application for the solar-panel maker. While Premier Li Keqiang said defaults may be unavoidable in some cases after Chaori failed to make a full coupon payment on March 7, the country has averted similar cases since. Widespread bond nonpayments would cause financial market turbulence, which can’t be allowed when the economy faces “relatively heavy” downward pressure, according to a front-page commentary in a central bank publication today. Chaori only paid 4 million yuan ($650,755) of an 89.8 million yuan coupon due in March on its 2017 bonds, becoming the first company to default on a yuan note onshore.

The Shanghai No. 1 Intermediate People’s Court accepted the restructuring application from Chaori’s supplier, Shanghai Yihua Metal Materials Ltd., because the solar-panel maker can’t repay overdue debt, according to a statement posted on the court’s website on June 27. As of March, Chaori’s liabilities were more than 700 million yuan greater than its assets, according to the statement. The Shanghai court appointed local branches of law firm King & Wood Mallesons and accounting firm KPMG Huazhen as the administrators, according to a July 10 statement. A meeting of Chaori’s noteholders set for March was delayed after the underwriter of the securities couldn’t find enough bondholders to attend for resolutions to be effective. China’s broadest measure of new credit plunged last month to the lowest since the global financial crisis, adding risks to growth as the government grapples with a property slump.

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US Losing Its Interest In Buying Chinese Companies (MarketWatch)

U.S. companies, and really companies all around the world, are losing interest in buying up their Chinese counterparts, according to a Dealogic report out Friday. Even as U.S. mergers and acquisitions volume abroad is up 47% year-to-date, American purchases of Chinese companies seem to have fallen off a cliff, dropping to just $611 million so far in 2014, down from $2.3 billion at this time last year, and marking the lowest level in 12 years, Dealogic said. Part of the problem involves a lack of big ($500 million or more) deals. The report showed no transactions of that size so far this year, while last year, there were already two such deals worth a combined $1.3 billion.

But it’s not just a U.S. issue: China’s total inbound M&A volume year-to-date is 10% less than it was at this time in 2013. And on a “deal activity” basis, the situation is even more stark: There have been just 271 agreements to buy Chinese companies this year, making Chinese M&A from abroad the weakest it’s been since 2003, Dealogic reported. The drop-off in U.S. merger interest in the world’s No. 2 economy could cap a decade of thirst for Chinese targets, with M&A volume by this point in the year coming in below the $2 billion mark only once (2012) in the 2004-2013 period. Although Dealogic didn’t offer a reason for the sudden chill in U.S. acquisitions into China, it did note that deals for Chinese health-care firms plunged from last year — $30 million year-to-date compared to $1.1 billion at this point in 2013.

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China Finds Mercedes-Benz Guilty Of Price Manipulation (Reuters)

German car maker Daimler AG’s luxury brand division Mercedes-Benz has been found guilty of manipulating prices for after-sales services in China, the official Xinhua news agency reported, citing authorities in Jiangsu province. An array of industries, from milk powder makers to tech firms, have been coming under the spotlight in recent years as China intensifies its efforts to bring companies into compliance with a 2008 anti-monopoly law. That legislation allows the country’s anti-trust regulator, the National Development and Reform Commission, to impose fines of up to 10% of a company’s Chinese revenues for the previous year. The auto industry has been under particular scrutiny, with a wave of investigations in the world’s biggest auto market prompting carmakers such as Mercedes-Benz, Volkswagen AG’s Audi, and BMW to slash prices on spare parts in recent weeks.

The Jiangsu Province Price Bureau, which launched its investigation last month, found evidence of anti-competitive practices after raiding Mercedes-Benz dealerships in the eastern coastal province as well as an office in neighboring Shanghai, Xinhua said in its report on Sunday. On Aug. 5, Mercedes-Benz said it was assisting the authorities in their investigation. A spokesman for the German brand was not immediately available to comment on the Xinhua report. “It is a typical case of a vertical monopoly in which the carmaker uses its leading position to control the prices of its spare parts, repair and maintenance services in downstream markets,” Zhou Gao, chief of the anti-trust investigation at the Jiangsu bureau, told Xinhua.

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Aug 142014
 
 August 14, 2014  Posted by at 6:37 pm Finance Tagged with: , , , ,  5 Responses »


Marjory Collins Italian-American banner parade, Mott Street, NY Aug 1942

The UN said earlier this week that in east Ukraine over 1000 people – a conservative estimate – were killed during the last fortnight in the battles over Donetsk and Luhansk. Today, there are again reports of more heavy shelling by the Ukraine “army”, and dozens more deaths, while the Russian aid convoy is still not – allowed – anywhere near the cities.

At this rate, who’s going to be left to receive any of the food and generators and sleeping bags? I have a dark suspicion that if we don’t resolve this issue, and fast, we’re going to regret that for a very long time.

For “us” to be subsidizing this sort of military operation, a policy largely underwritten and justified by unsubstantiated blame claims in a media-wide campaign about a tragic plane crash 4 weeks ago to the day, is not something even a single one of us should be proud about, let alone happy.

We should all feel deep shame and guilt. How can we at the same time denounce one genocide and sponsor another? Our leaders may not care about a dead body or two more or less, but that doesn’t mean we shouldn’t either.

And how many hundreds of American soldiers are already back on the ground in Iraq again, while their army commanders emphasize the limited scope of air strikes? Are we supposed to just wait for the PR spin to serve up the justification for boots on the ground in their thousands? What’s it going to be this time? And how wrong is Ron Paul in suggesting this is a trap?

Whatever it is, we better make it fast, and step on the gas, or Europe will no longer be of much help. Well, either that or their domestic problems will; become the very driver for their involvement in warfare abroad. Even the Germans are sending support in Iraq now, right after the US announced they found there are far less Yazidi people on Mount Sinjar than someone told them there were. Perhaps they should all ask Putin to help. With both aid and intelligence.

And grout. The Mosul dam was built on gypsum and needs daily injections of grout – a liquified cement – or it falls to pieces. No need to bomb it. And that would mean flooding Baghdad – and the US multi-billion Green Zone. Mission accomplished.

However that may be, 6-7 years into the famed recovery, of which we’ve, come to think of it, seen about as little evidence as of the alleged rebel/Russian involvement in the plane crash, Germany’s GDP drops. Now, you’re thinking, so did US GDP earlier this year, and we spun our way out of that without a glitch. All under control, Captain, my Captain.

But Germany has 27 weaker vassal states on its back, and if it can’t even carry its own weight anymore, then what’s next? Obviously, there are plenty of experts claiming it’s a temporary thing, but when temporary gets to mean 6 years and more, it becomes meaningless.

Then again, so much in the propaganda machine we live in, that dictates what we think about the economy and about politics, is devoid of any real meaning, and the machine’s still going strong, fueled by the people’s unquestioning ignorance and their fear of losing their comfy plush caves. Baby, it’s cold outside. Older than Rome.

Spain was supposed to be the leading example of what weaker European brothers could do. Turns out, that was also just spin. Industrial production does not fall in economies recovering from gutter scraping circumstances. France is a basket case. A basket increasingly filled with stale bread and cheap wine.

Other EU nations report actual growth, but why should we believe any of them? Why should we believe any of this has to do with anything but appearances?

One country where keeping up appearances simply doesn’t work anymore – and that’s saying a lot these days – is Italy. A new young prime minister was elected on big promises – and already failed miserably. Nothing can save Italy as long as it’s part of the Eurozone. Or Greece, or Portugal, or Spain. Policies will be set according to what the richer nations want and need, and while the disadvantages of that can be hidden in times of plenty, they stand out all the more in poorer days.

On the surface, Italy doesn’t even seem to do that bad. It has a primary surplus, for one thing. It’s just that, as Ambrose Evans-Pritchard writes:

Output has collapsed by 9.1% from the peak, back to levels last seen 14 years ago. Industrial production is down to 1980 levels. [..] Bank loans to business are still falling at a rate of 4.5%. [..] The debt ratio may test 140% by the end of the year, uncharted waters for a country that effectively borrows in D-Marks.

It’s the debt that does in Italy, at least as long as it’s denominated in euros. Tempted by manufactured low yields on its bonds, Rome lets the debt soar on:

Ambrose calls for spending, he’s a Keynes man. To him, the failure is the resistance to more spending, in the spirit of the Fed, and Tokyo and Beijing, by Brussels – or Berlin.

But I think it would be, and would always have been, borderline lethal, since it would be like throwing debt on top of the debt Himalayas. There is a limit beyond which more spending cannot possibly be of any help, and the entire western world passed that limit many years and many trillions of dollars and yen and euros and liras ago. What’s left is the interest payments that are certain to burden us like so many Quasimodo’s for many years to come.

No, Ambrose has it right in some of his other comments

Mr Renzi is on his own. He faces an ECB that has fundamentally violated its contract with Italy, letting EMU-wide inflation fall to 0.4% knowing that this causes the Italian crisis to metastasise.

Italy must look after itself. It can recover only if it breaks free from the EMU trap, retakes control of its sovereign policy instruments and renominates its debts into lira, with capital controls until the dust settles. Italy would not face an immediate funding crisis since it has a primary budget surplus. Its net international investment position is -32% of GDP, compared with -92% for Spain and -100% for Portugal.

There is no easy way to leave the euro. The interlocking structures of monetary union have gone much further than a fixed exchange peg. Vested interests are powerful and merciless. But it is not impossible either.

The matter will surely come to a head as Italy’s debt trajectory hits the danger zone. This time it may not be quite so clear that the country wishes to be rescued on European terms. Mr Renzi may appropriately conclude that the only possible way to deliver on his Risorgimento for Italy, and to craft his own myth, is to gamble all on the lira.

I don’t see Matteo Renzi crafting his own myth, I don’t see him sticking around long enough. Someone’s got to take the blame, and no matter how much choice Italy has by now, there’s always room for one more.

But I do think that at some point Italy will see there are no other choices left but to be its own boss.

It’s just that the sooner it does, the better it would be by far. It’ll be much harder when everyone else is running for cover too.

It would seem however, that Italy’s own propaganda machine needs to be silenced first. And that’s never easy.

Japan And Italy Break New Sovereign Debt Load Records (Zero Hedge)

With Japanese and Italy 10Y bond yields hitting all-time record lows (0.505% and 2.626% respectively), one could be forgiven for thinking that all-is-well as term or devaluation premia are oddly missing. However, as the following two charts show, Japan and Italy just broke another record – sovereign debt loads (1.038 quadrillion JPY and 2.17 trillion EUR respectively). Japan – having topped 1 Quadrillion early in the year – is marching ahead…

and Italy is not looking back – just look at that ‘austerity’…

Keynes would be proud…

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Italy’s Renzi Must Bring Back The Lira To End Depression (AEP)

Italy has been in depression for almost six years. The slump has been punctuated by false dawns, overwhelmed each time by the monetary amateurs in charge of EMU policy. The latest recovery fizzled after a single quarter. The economy is in technical recession again. Output has collapsed by 9.1% from the peak, back to levels last seen 14 years ago. Industrial production is down to 1980 levels. It takes spectacular policy errors to bring about such an outcome in a modern economy. Italy did not suffer anything like this during the Great Depression, clocking up growth of 16% between 1929 and 1939. But not even Mussolini was maniacal enough to pursue his Gold Standard delusions until the bitter end. The Italian authorities discern flickers of recovery, like fortress guards in Dino Buzzati’s Desert of the Tartars, deceived by optical illusions on the lifeless horizon. Bank loans to business are still falling at a rate of 4.5%. Moody’s says the economy will contract by 0.1% this year. Societe Generale is pencilling in -0.2%.

The property slump has not yet touched bottom. The Bank of Italy said the number of months needed to sell a house has risen to 9.4, from 8.8 late last year. The number reporting worsening market conditions has jumped from 19.6% to 34.7% in three months. “We can’t keep going any longer,” said the Taranto branch of Italy’s business lobby, Confindustria, in an open letter to the country’s president. The region is becoming an “industrial desert”, it warned, with small companies on the brink of mass closures and lay-offs. The lethal mix of economic contraction and zero inflation is causing Italy’s debt trajectory to spiral upwards, despite austerity and a primary surplus of 2% of GDP. Public debt jumped to 135.6% in the first quarter from 130.2% a year earlier. This is a mechanical effect, the result of a compound interest burden on a static nominal base. Real interest rates on Italy’s €2.1 trillion stock of debt – with an average maturity of 6.3 years – is actually rising as deflation draws closer.

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German GDP Contracts as French Economy Stagnates (WSJ)

Germany’s economy contracted while France’s stagnated in the second quarter, indicating the euro zone’s yearlong recovery may have stalled, and likely pressuring policy makers to come up with some new ideas for boosting growth. The euro zone’s largest economy contracted 0.2% in the three months to June, Germany’s federal statistics office said, the first decline in output since the start of 2013. Compared with the second quarter of 2013, output was up 1.2%. Economists polled by The Wall Street Journal last week said they expected the economy to shrink 0.1% on the quarter and grow 1.4% in annual terms. Destatis said that net trade was a drag on growth, as import growth outpaced export growth. Construction investment declined, but Destatis said this was due to projects being pushed forward because of the unusually mild winter. Both private and public consumption rose compared with the first quarter, the statistics office said.

Earlier on Thursday, figures from France’s statistics agency showed the euro zone’s second-largest economy failed to record any growth for the second successive quarter in the period April through June. Economists polled by the Journal had expected a 0.1% expansion in gross domestic product in the second quarter from the first. Compared with the same period of 2013, GDP was up just 0.1%. Figures published earlier this month showed Italy’s economy also contracted in the second quarter, by 0.2%. The data released Thursday mean that none of the euro zone’s three largest economies—which account for two thirds of the currency area’s output—expanded in the three months to June, making it unlikely that the euro zone as a whole managed to generate any growth.

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Eurozone Woes Deepen As Spain’s Industry Slumps (Guardian)

Hopes for a recovery in the eurozone suffered another blow on Wednesday with figures showing industrial output fell for a second successive month. Production declined across the 18 eurozone members by an average 0.3%, with a return to growth in France and Italy offset by falls in Ireland and the Netherlands and slow progress in Germany, which struggled to 0.2% growth. Spain was the worst hit of the currency bloc’s major economies with a 0.8% drop in industrial production. It also suffered the sharpest drop in shop prices for five years, undermining Madrid’s claim that a rebound in employment last month was a clear indication of the country’s return to sustained growth. Spanish consumers have proved reluctant to spend on the high street while unemployment remains at around 25%, forcing shops to offer bigger discounts in July than June.

Weakness across the manufacturing, energy and mining sectors will pose a problem for Brussels and the European Central Bank (ECB), ahead of second-quarter GDP figures on Thursday that are expected to show a further slowdown from the 0.2% growth in the first three months of the year. The €9.6tn economy is struggling to gain momentum with its recovery a year after exiting recession. High unemployment, sluggish reforms and the fallout from conflict in Ukraine, Gaza and Iraq are holding it back. The latest sign of just how fragile the eurozone’s economic rebound remains came this week, after German investor sentiment dropped to its lowest level since December 2012 on concerns that European sanctions against Russia will harm exports.

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A worldwide new metric?!

German GDP Set To Swell On Sex, Drugs And Weapons (DW)

What do research and development, prostitution, drug smuggling and arms trafficking have in common? They are all seen as economic activities, and starting Sept. 1, they will be counted as part of Germany’s annual economic performance, or gross domestic product, in line with new calculation standards. The new figures include revenues from prostitution and the sale and smuggle of illegal drugs. “All relevant economic activities should be counted without any moral judgement,” Norbert Räth from Germany’s statistical office, Destatis, told DW. According to official estimates, there are around 400,000 prostitutes in Germany, 20,000 of whom are men. Altogether they earn €14.6 billion ($19.5 billion) a year. Minus various expenses, such as rent in brothels, work attire and condoms, and the statisticians get a gross value added of roughly €7.3 billion. For drugs, it is the same story. Surveys commissioned by the Federal Health Ministry allow officials to estimate the prevalence of drug use in Germany.

This figure is then multiplied by the respective prices on the black market – something Germany’s Federal Criminal Police Office knows very well. Even the amount of money the state spends on armaments is now subject to the new rules. “The production of weapons has, of course, always been included,” Räth said. But until now those costs had always been written off as a state expense. Now they are considered an investment. Now countries in the EU have a uniform method of calculating their GDPs. And when new items are added to GDP calculations, it grows. One could speculate that there is an ulterior motive behind the new system, namely one that sugarcoats Europe’s sovereign debt. Even if overall debt is not reduced, the debt ratio sinks when GDP increases. “We are going to have to categorically deny that,” said Norbert Räth from Germany’s statistical office, Destatis. “The whole process is not politically motivated. It hasn’t been all along.”

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“Could debt diabetes be right around the corner?”

The Shale Sugar Lick (EnergyPolicyForum)

A well known American comedian, Ron White, quips about the amount of sugar Americans eat by suggesting that certain restaurants install a sugar lick. Patrons can “belly up” and take their fill at the trough. Such an analogy might be apropos of some shale operators with regard to their addiction to debt. A useful metric when evaluating a company is to look at the ratio between interest expense and operating income. A low ratio means that the company has not needed to borrow great sums of money to keep going. It generates sufficient cash to fund future operations without exorbitant levels of debt or shareholder dilution from issuing more stock. Examining a selection of shale operators who are active in various plays in the US, one sees an interesting pattern. Perhaps it would be useful to define operating income. Operating income is gross income minus day to day costs of running the business including salaries and then subtracts depreciation. It is a metric that investors use to determine how much potential profit a company might generate.

Obviously it gives a more accurate picture of a firm’s profitability than simply gross income because costs have been removed. But not interest expense. Recently, the oil and gas industry’s appetite for debt has exploded primarily because cash is not being generated by the underlying business proportional to its needs. This is particularly true of some shale operators. EIA, the forecasting arm of the US Department of Energy, quantified this appetite for debt. EIA stated: “The gap between cash from operations and major uses of cash has widened in recent years from a low of $18 billion in 2010 to $100 billion to $120 billion during the past three years.” To demonstrate how this phenomenon translates to a company’s financial statement, one need only to examine the ratio between interest expense and operating income. The following chart shows the percentage of total operating income, or potential profit, that is being eaten up by nothing more than interest paid on debt at Range Resources, Devon Energy, Quicksilver Resources, Encana and Exco.

Shale operators have, indeed, parked themselves at the sugar lick debt trough for quite some time now. Could debt diabetes be right around the corner?

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Ron Paul: “This Is Exactly What Osama Bin Laden Wanted” (RT)

Even if the US abandons its efforts, Paul added, assistance provided to other groups throughout the region may end up sabotaging attempts to dismantle the Islamic State if weaponry trickles downs into the hands of militants. Firepower already provided by the Pentagon in and around Iraq has found itself in the wrong hands, Paul said, and the only solution to prevent further unintended consequences is to keep America out of international conflicts altogether. “I would stick to the basic principle that we have a strong national defense, we defend our national security, we don’t get involved in fights around the world, we don’t get involved in civil strife and civil wars and especially what was going on in the middle east,” he said, “so no, I think the argument stands on its own merits that we shouldn’t be involved in doing this.”

“I think the sooner we get out of there the better,” Paul told David. “We don’t have a moral responsibility; we don’t have a constitutional responsibility. It has nothing to do with our national security. It in jeopardizes our national security and is bankrupting our country.” What’s more, Paul added, is that the US government’s ongoing meddling in the Iraqi affair and other incidents is falling exactly in line with Al-Qaeda. According to Paul, terrorists have long intended to take the US down by wasting its resources on campaigns, the likes of which have been called fodder for some by further fanning the flames of anti-American sentiments through military action carried out in far apart countries. “This is exactly what Osama bin Laden wanted,” Paul said. “He wanted to engage us over there because he said, ‘I’ll bring you down like I brought the Soviets down.’ We are doing the same thing because we flat out can’t afford it. It’s a failed policy. I think after so many years and so many decades we ought to admit the truth.”

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Another War In Iraq Won’t Fix The Disaster Of The Last (Guardian)

The media and political drumbeat is growing louder for Britain to move from humanitarian aid drops to join the military campaign. France has announced it will be arming Iraqi Kurdish forces. There are already 800 US troops back on Iraqi territory. Without a trace of irony, Colonel Tim Collins, who famously claimed on the eve of the 2003 invasion that British troops were occupying Iraq to “liberate” it, yesterday led the call for yet another military intervention. If ever there was a case for another Anglo-American bombing campaign, some say, this must surely be it. Graphic reports of the suffering of tens of thousands of Yazidi refugees on Mount Sinjar and the horrific violence that has driven the Christians of Qaraqosh from their homes have aroused global sympathy. The victims of this sectarian onslaught need urgent humanitarian aid and refuge.

But the idea that the states that invaded and largely destroyed Iraq at the cost of hundreds of thousands of lives should claim the cause of humanitarianism for yet another military intervention in Iraq beggars belief. If the aim were solely to provide air cover for the evacuation of Yazidis from Sinjar, there are several regional powers that could deliver it. The Iraqi government itself could be given the means to do the job – something its US sponsors have denied it until now. In fact, the force that has done most so far to rescue Yazidis has been the Kurdish PKK, regarded as a terrorist organisation by the US, EU and Turkey. But after decades of lawless unilateralism, any armed intervention for genuine humanitarian protection clearly has to be authorised by the United Nations to have any credibility. As the Labour MP Diane Abbott put it, that’s what the UN is for – and authorisation could be quickly agreed by the security council. But of course it’s not just about the Yazidis or the Christians.

As Obama has made clear, they’re something of a side issue compared with the defence of the increasingly autonomous Iraqi Kurdistan – long a key US and unofficial Israeli ally – and American interests in its oil boom capital Irbil, in particular. The US is back in Iraq for the long haul, the president signalled, spelling out that his aim is to prevent IS establishing “some sort of caliphate through Syria and Iraq” – which is exactly what the group regards itself as having done. The danger of the US, Britain and others being drawn again into the morass of a disintegrating state they themselves took apart is obvious. IS, then known as al-Qaida in Iraq, itself effectively arrived in the country in 2003 on the backs of US and British tanks. The idea that the states responsible for at least 500,000 deaths, 4 million refugees, mass torture and ethnic cleansing in Iraq over the past decade should now present themselves as having a “responsibility to protect” Iraqis verges on satire.

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Iraq’s Mosul Dam Demands 24/7 Maintenance (Zero Hedge)

Last week, the barbaric Islamic State (IS) seized the vitally important Mosul dam, dramatically impacting tactical options against them and potentially changing the future of the Middle East. When the US coalition forces invaded Iraq in 2003, military intelligence developed invasion scenarios. One scenario included Iraqi forces placing detonation charges at the vitally important dam. If US forces were able to safely secure the dam, then they had a contingency plan to operate it and ensure critically important maintenance. The US quickly discovered the necessity for $27 million worth of frantically urgent repairs. Since the dam was completed in the mid-1980’s it has required continuous (daily) maintenance, because it was built on top of gypsum, a soft mineral which dissolves when in contact with water. More than 50,000 tons of materials have been injected into the dam since 1986. The ‘sink hole’ type of cavities that constantly form have to be expeditiously plugged with “grout”, a liquefied mixture of cement and other additives.

A dam break does not require sabotage. Maintenance failure has the same result. In December of 2006, the US Army Corp of Engineers (USACE) detailed a comprehensive report on the dam’s structure. The report called it, “the most dangerous dam in the world”, stating that even water pressure could buckle the flimsy foundation. The Mosul dam is the fourth largest in terms of reservoir capacity in the Middle East with a capacity of 3 trillion gallons or 11.1 billion cubic meters. It is a key component of Iraq’s power grid and source of water for irrigation. It is located 31 miles north of the city of Mosul whose population is 1.7 million and 200 miles north of Bagdad. A dam collapse would release the 360 feet high waterline and reach Mosul in 2 hours. A USACE official wrote a report in 2011 that was published in Water Power magazine estimating that dam failure could lead to as many as 500,000 civilian deaths.

In 2007, General Petraeus wrote a letter to the Iraqi PM warning of the safety concerns in the report and the consequences should the dam fail. In paraphrasing the USACE report, his letter said that “despite continuous grouting… the safety of the dam cannot be assured”. He went on to say that “…an instantaneous failure….could result in a flood wave 65 feet deep at the city of Mosul… and produce flooding all the way to Baghdad”. President Obama recently authorized limited airstrikes in Iraq against IS. He said they were to prevent a humanitarian crisis and to protect American lives and assets in Erbil and Baghdad. He determined that there was risk of ‘genocide’ of the tens of thousands of Yazidis people trapped by IS in the mountains, as well as, risks to the consulate and American workers there, should Erbil be toppled. There is still hope on both fronts.

However, the greatest foreign policy failure to date in trying to prevent a potential ‘genocide’ is arguably allowing IS to take over the dam in the first place. The US has always known the importance of the dam. Furthermore, just as we had the ability to get Bin Laden at Tora Bora and failed to act, US officials knew that the IS leadership was assembled in one place and decided not to take them out.

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Iraq’s Mosul Dam Needs US Boots On The Ground (Kotok)

History is replete with examples of bridges and dams threatened by warfare. The winning side wants to hold them. The losing side wants to destroy them. Or they can be used to gain a military advantage. In the August 12 issue of the Wall Street Journal, there is a map of Iraq that illustrates the situation with Mosul Dam, as reported in “Limits of Airstrikes Hinder U.S. Policy in Iraq.” Think about what happens if IS (Islamic State) loses and has to withdraw from the dam. Their actions will be just what we can contemplate, unless there is an intervention by skilled ground forces that can overwhelm them prior to their blowing the dam. The alternative is that IS prevails and holds the dam, in which case there are very serious implications for the region, including the danger that the dam will fail simply because it is not being maintained properly.

This is a catch-22. In psychological terms, it is an avoidance-avoidance conflict. There are no easily determined good outcomes. Think about oil production in the broader region, the populations imperiled downstream from the dam, and this murderous and merciless foe called IS. We confront a high probability of an adverse outcome regardless of the actions of the combatants on both sides. There is no easy out. A 2006 report by the US Army Corps of Engineers called Mosul Dam “the most dangerous dam in the world.” The dam was so poorly constructed, on such problematic (gypsum-rich) ground, that it requires daily injections of a mixture of cement, sand, and water – grout – into the voids that are forming under the dam. These injections ceased nearly a week ago when IS captured the dam and nearly all dam personnel fled.

So even if IS does not blow the dam, or even if Kurdish or Iraqi forces recapture it, the dam may be so compromised that it ruptures, sending a 65-foot wave down the Tigris River to smash the city of Mosul (just 30 miles downstream) and flood large portions of Baghdad (the US says its embassy there is threatened). The time for easy outs passed some time ago, when the US might still have been able to assert air superiority over the region before IS strengthened. At this point IS is using captured American weapons and financial assets in order to grow even stronger. We can use our targeted bombing to help rescue thousands of civilians. We can attempt to supply and arm the apparent alliances that are anti-IS and that reside in the Kurdish areas. But without the commitment of highly skilled American ground troops in large numbers, we cannot safeguard dams, rivers, or bridges – or the people of Mosul and Baghdad.

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Of course.

Stated Income Loans Make Comeback As Mortgage Lenders Seek Clients (Reuters)

Mortgage applicants who can’t provide tax returns or pay stubs to show their income are getting stated income loans again as companies such as Unity West Lending and Westport Mortgage chase customers they can no longer afford to ignore. Lenders say these aren’t the same products as the so-called “liar loans” that were pervasive before the housing bust. Instead, the loans are going to borrowers such as small business owners or investors buying properties they intend to rent who can demonstrate an ability to repay, verifiable through bank or brokerage statements. Lenders said they look for enough assets to pay six to 12 months of payments, while also demanding high down payments to reduce the chance of default. “This is not a return to the wild and wooly days of, if you fogged the mirror, you can have a loan,” said Paul Lebowitz, founder of Westport Mortgage. “They have a smarter edge to them now.”

Some rival lenders said the stated income loans on offer could be abused if borrowers fudge bank statements or don’t have enough money to repay the loan. None of the three biggest banks offer them. Sam Gilford, a spokesman for the Consumer Financial Protection Bureau, said the agency is concerned, though he wouldn’t say whether it is investigating them. The CFPB’s rules don’t give specific minimums for assets required to demonstrate an ability to repay a mortgage, but critics said a year’s worth of payments for a three-decade loan may not be enough. “It’s easier to falsify bank statements than income tax returns,” said Julia Gordon, director of housing finance and policy at the Center for American progress. To avoid the housing-bust taint, the new stated income loans are being called such things as “alternative documentation loans,” “portfolio programs,” “alternative-income verification loans” and “asset-based loans.”

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The banks rule in Japan as much as in Europe and the US.

Japan Megabanks’ $800 Billion Cash Pile Shows Abe Task (Bloomberg)

Prime Minister Shinzo Abe has succeeded in wrestling down the yen and snapping a 15-year deflationary spiral. The challenge of spurring lending by the country’s cash-hoarding megabanks remains. The nation’s three largest lenders increased their cash and deposits with other financial institutions 5.7 percent in the quarter to June to 82 trillion yen ($800 billion) from the previous three-month period, earnings data show. New loans by Mitsubishi UFJ, Mizuho Financial Group and Sumitomo Mitsui Financial Group fell 329 billion yen to 239.1 trillion yen. Abe needs to spur lending after the world’s third-largest economy shrank at an annualized 6.8 percent in the second quarter due to an April sales-tax increase aimed at curbing the world’s biggest debt burden.

While the banks can no longer park excess cash in sovereign debt amid expectations for higher yields, falling loan rates have narrowed the spread over deposit payments to levels that discourage extending credit, according to Moody’s Investors Service. “The big three are at a turning point,” said Graeme Knowd, an associate managing director who oversees corporate and financial institutions at Moody’s in Tokyo, in an interview. “They haven’t really taken credit risk for a long time. If Abenomics works, they need to reorient the business model.” Deposits at Japanese financial institutions exceeded loans by 192.5 trillion yen last month, according to Bank of Japan data. The surplus reached a record high 194.2 trillion yen a month earlier.

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Not stagflation, deflation.

Stagflation Stalks Abenomics (Bloomberg)

Maybe it’s time to stop dismissing the risk of stagflation in Japan. I’ve raised this risk a couple of times during the last 12 months as inflation rose without commensurate increases in wages or productivity. But yesterday’s ugly gross domestic product report suggests it’s a clear and present threat to Japan’s best chance at economic recovery in more than a decade. The collective reaction yesterday to the 6.8% plunge in second-quarter growth seemed to be: “Relax, it could’ve been worse.” After all, many economists were braced for a 7%-plus contraction following an ill-timed and ill-conceived consumption-tax increase in April. Yet the detail of the report – and the balance of other recent data – point toward a period of sluggish growth, at best, and continued inflation gains.
Thanks to the Bank of Japan’s unprecedented easing and the yen’s 16 percent drop during Prime Minister Shinzo Abe’s term, consumer prices rose 3.6% in June from a year earlier. That wouldn’t be a problem if incomes and productivity weren’t walking in place.

The 5% drop in inflation-adjusted consumption in the second quarter, meanwhile, was even greater than the recession-causing sales-tax hike of 1997, observes Richard Katz, publisher of the Oriental Economist Report. There’s evidence, too, that the gains in corporate profits that the weaker yen delivered to manufacturers is fading. Last week, Toyota stuck with a forecast for net income to drop from last year’s record $17.8 billion. Now, Japan’s largest carmakers are hunkering down for slumping domestic sales, highlighting the damage to demand by the 3 percentage point increase in the sales levy. Panasonic also is struggling as its fixed costs rise and demand for electronics in Japan wanes. Optimism that deflation has been defeated ignores the sources of today’s price increases. With the nation’s nuclear reactors switched off for safety reasons, Japan is importing expensive energy with devalued yen. This, along with doubts about the trajectory for household demand, helps explain why companies aren’t increasing wages to offset the effects of inflation.

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Sounds good, but …

Small Chinese Cities Swap GDP For Quality Of Life Metrics (FT)

More than 70 Chinese smaller cities and counties have dropped gross domestic product as a performance metric for government officials, in an effort to shift the focus to environmental protection and reducing poverty. The move, which follows a directive issued by top leaders last year, is among the first concrete signs of China switching its blind pursuit of economic growth at all costs towards measures that encourage better quality of life. Analysts say that adherence to GDP as a performance metric – thus linking it to local officials’ promotion – has contributed to environmental degradation and urban sprawl as officials encouraged heavy industry and bulldozed agricultural land to build housing developments.

“Using GDP as the main assessment method has caused a lot of problems, like unequal income distribution, problems with the social welfare system and environmental costs,” said Xie Yaxuan, head of macroeconomic analysis at China Merchants Securities in Shenzhen. Hebei, a steelmaking province north of Beijing, and Ningxia, an impoverished ethnic minority region in northwest China, have cancelled GDP-based assessment for poor counties and cities, the official Xinhua news has reported in recent months. Evaluation will instead be based on raising living standards for poor residents and reducing the number of people living in poverty.

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Does Beijing control it all? I think not.

China’s Credit Slowdown: A Default Risk? (CNBC)

China’s sharp credit growth slowdown in July may signal rising default risks in some parts of the economy, analysts said. “The phase of unchecked shadow banking growth is over, while the housing downturn is not,” Wei Yao, an economist at Societe Generale, said in a note Wednesday. China’s debt levels – which soared to 250 percent of gross domestic product (GDP) according to some estimates – have been a major concern for years, spurring fears that the borrowing surge is fueling a dangerous property bubble and overcapacity in many industries, including steel, mining and solar energy, any of which could face collapse as the economy slows and Beijing tries to choke off overinvestment. In July, the total social financing (TSF) aggregate fell to 273.1 billion yuan ($44.34 billion), indicating the amount of money flowing into China’s economy slowed to the lowest monthly reading since the October 2008 depths of the global financial crisis.

Some are concerned about the decline in new shadow banking, particularly for the trust funds. “The trust fund industry is the single largest funding provider behind the wave of leveraging up among the local governments and property developers over the recent years,” Dong Tao, an economist at Credit Suisse, said in a note Wednesday. Tao cited data from the China Trust Industry Association which showed the trust industry’s assets under management hit a record high of 12.48 trillion yuan in the second quarter, but asset growth was only 6.4 percent from the previous quarter, the slowest since data became available. “The decline in capital influx for trust funds will likely have direct implications on funding for infrastructure and property projects,” Tao said. “It also threatens the ability of debt repayment of these players when the debt matures.”

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They already have new loan provisions, just more sneaky ones.

China Seen Taking Steps to Aid Growth After Credit Plunge (Bloomberg)

China’s plunge in credit expansion last month and unexpected slowdown in investment spending flashed warnings on growth that investors and economists bet will spur policy makers to expand stimulus. Barclays is forecasting two second-half interest-rate cuts, while Australia & New Zealand Banking Group said a reduction in banks’ reserve requirements is imminent. A front page story today in the official China Securities Journal said monetary policy will continue to “lean towards relaxation amid a stable stance.” A property slump and dangers from rising bad loans are making it tougher for Premier Li Keqiang to sustain the fastest growth in the Group of 20 nations. Any stimulus would build on measures this year to expedite railway spending, free up money for loans for small businesses and channel funds toward building low-income housing.

“The top concern right now is to make sure the economy can be reasonably smooth in its growth, rather than controlling the risks,” said Li Daokui, a former PBOC academic adviser who’s a professor at Tsinghua University in Beijing. Aggregate financing was 273.1 billion yuan ($44.4 billion) in July, the central bank said yesterday, contrasting with a Bloomberg LP gauge that showed China loosened monetary conditions last quarter at the fastest pace in almost two years. The PBOC measure includes bank loans, corporate bonds and shadow-finance categories such as entrusted loans. The credit number compared with the 1.5 trillion yuan median estimate of economists, while new local-currency loans of 385.2 billion yuan were half of projections. M2 money supply grew a less-than-anticipated 13.5 percent from a year earlier. “It is important for both monetary and fiscal policy easing to continue in the coming months,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in an e-mail.

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Not surprised.

1 in 3 US Soldiers May Not Get Post-Trauma Help Under New Rules (Bloomberg)

Some U.S. soldiers suffering from post-traumatic stress disorder after service in Iraq and Afghanistan may not be diagnosed with the condition because of new guidelines to assess the illness, a study found. About 1 in 3 soldiers found to have PTSD under the previous diagnostic standards were missed by the new criteria, according to today’s research in the journal the Lancet Psychiatry. About 5.2 million adults in the U.S. suffer from post-traumatic stress disorder each year, according to the U.S. Department of Veterans Affairs. Today’s study, one of the first to compare the two sets of diagnostic standards in infantry soldiers, shows that more research is needed to determine how the new rules will affect patient care, said Charles Hoge, the lead study author and a senior scientist at Walter Reed Army Institute of Research in Silver Spring, Maryland.

“For military service members and veterans if they’ve been treated for PTSD or are in treatment for PTSD according to the old criteria, their diagnosis isn’t going to change,” Hoge said in a telephone interview. “New people coming into treatment now, it is possible some of those individuals would’ve gotten a diagnosis of PTSD but they are not receiving that diagnosis now.” People who have post-traumatic stress disorder experience flashbacks, nightmares and mood swings that disrupt their daily lives. The disorder is best known for occurring in veterans of war or victims of an assault.

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We’ll get wet feet denying it.

Antarctic Melt May Lift Sea Level Faster in Threat to Megacities (Bloomberg)

Antarctica glaciers melting because of global warming may push up sea levels faster than previously believed, potentially threatening megacities including New York and Shanghai, researchers in Germany said. Antarctica’s ice discharge may raise sea levels as much as 37 centimeters (14.6 inches) this century if the output of greenhouse gases continues to grow, according to a study led by the Potsdam Institute for Climate Impact Research. The increase may be as little as 1 centimeter, they said. “This is a big range, which is exactly why we call it a risk,” Anders Levermann, the study’s lead author, said in a statement. “Science needs to be clear about the uncertainty so that decision makers at the coast and in coastal megacities can consider the implications in their planning processes.”

NASA estimates the glaciers in the Amundsen Sea region contain enough water to raise global sea levels by 4 feet (1.2 meters) and in May said the glacier melt may have become “unstoppable.” The Potsdam institute’s projections for this century’s sea level contribution are “significantly higher” than the latest upper-end projections from the Intergovernmental Panel on Climate Change, it said. “Earlier research indicated that Antarctica would become important in the long term,” Levermann said. “But pulling together all the evidence it seems that Antarctica could become the dominant cause of sea level rise much sooner.”

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Death toll is probably much higher.

African Nations Apply Medieval Measures To Halt Ebola Spread (NY Times)

The Ebola outbreak in West Africa is so out of control that governments there have revived a disease-fighting tactic not used in nearly a century: the “cordon sanitaire,” in which a line is drawn around the infected area and no one is allowed out. Cordons, common in the medieval era of the Black Death, have not been seen since the border between Poland and Russia was closed in 1918 to stop typhus from spreading west. They have the potential to become brutal and inhumane. Centuries ago, in their most extreme form, everyone within the boundaries was left to die or survive, until the outbreak ended. Plans for the new cordon were announced on Aug. 1 at an emergency meeting in Conakry, Guinea, of the Mano River Union, a regional association of Guinea, Sierra Leone and Liberia, the three countries hardest hit by Ebola, according to Agence France-Presse. The plan was to isolate a triangular area where the three countries meet, separated only by porous borders, and where 70 percent of the cases known at that time had been found.

Troops began closing internal roads in Liberia and Sierra Leone last week. The epidemic began in southern Guinea in December, but new cases there have slowed to a trickle. In the other two countries, the number of new cases is still rapidly rising. As of Monday, the region had seen 1,848 cases and 1,013 deaths, according to the World Health Organization, although many experts think that the real count is much higher because families in remote villages are avoiding hospitals and hiding victims. Officials at the health organization and the Centers for Disease Control and Prevention, which have experts advising the countries, say the tactic could help contain the outbreak but want to see it used humanely. “It might work,” said Dr. Martin S. Cetron, the disease center’s chief quarantine expert. “But it has a lot of potential to go poorly if it’s not done with an ethical approach. Just letting the disease burn out and considering that the price of controlling it — we don’t live in that era anymore. And as soon as cases are under control, one should dial back the restrictions.”

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Not good.

Ebola A ‘High Risk’ In Kenya, East Africa, WHO Warns (RT)

The World Health Organization (WHO) has said that Kenya is at “high risk” of the spread of the deadly Ebola virus because it is a major transport hub, with several flights a day to West Africa where the disease is running riot. This is the most serious warning to date that the disease could spread to East Africa. So far it has been limited to West Africa, where it has ravaged Guinea, Sierra Leone and Liberia, killing more than 1,000 people. Nigeria, Africa’s most populous country, is the latest to be hit. The country of over 150 million people has now seen three deaths from Ebola. Although health checks have been stepped up in Nairobi airport in recent weeks, the Kenyan government has said it will not ban flights from the four countries hit by Ebola, because of the porous borders between African countries. There more than 70 flights a week between Kenya and West Africa. “We do not recommend a ban of flights because of porous borders,” said Kenyan health cabinet secretary James Macharia.

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Aug 112014
 
 August 11, 2014  Posted by at 4:51 pm Finance Tagged with: , , , , ,  9 Responses »


John Vachon General store and post office in Little Creek, Delaware Jul 1938

Boy, what a day so far; hard to keep up. tell me, is it just me, or has the US really started another round of regime change in Iraq?

Washington wants a new government in the capital, Baghdad, a national unity one, ostensibly to respond to the Islamist State threat.

PM Maliki doesn’t want to go, but also can’t lead such a government (nobody likes him). Iraqi President Fuad Masum then tells him off, so does a court. Maliki sends loyal troops into Baghdad, threatens to take the President to court, and the latter names deputy parliament speaker Haider Al-Abadi as new PM.

Meanwhile, the US pulls their support from Maliki, and the Islamist State conquers another city not far from the capital, and not anywhere near where the Americans are bombing them.

And most of that was before America had even woken up.

BTW, the President is Kurd, Maliki is Shi’ite, and the parliament chairman is Sunni. Lovely. National unity? You would need a nation first.

The US yesterday started directly arming the Kurds under siege where they are indeed bombing, and the Kurds took back some ground from the IS.

Wait a minute! The US is arming the Kurds? For real? Did they forget the longstanding fight between the Kurdish PKK and the Turks over Kurdistan? The Turks who yesterday elected Erdogan as their president?

That’s the same Erdogan who is hated by all his neighbors, Israel, Syria, Iraq, Iran, and who’s said some ugly things about America too, but who they need to keep the IS from moving north.

Erdogan might be at least a little bit nervous that these US arms may someday be used against him to make Kurdistan a sovereign nation after all.

Kurdistan, which for many decades has been a nation on paper only, stretches across Iraq and Turkey (where 18% are Kurds). And Iran, Syria, Armenia and Azerbaijan.

In the middle of the – clickable – map, you see Mosul (the dam the IS took), Erbil (the town the US is shelling) and Kirkuk, near which one of the world’s main mega oilfields is located.

And isn’t it interesting to know that the Kurds forcibly took control of that oilfield on July 11, 2014, from the Iraqi government? It all adds to the intrigue. Who shall we support today? If today is Monday …

Wikipedia on Kurdistan and its oil and gas reserves, in particular the Kirkuk field:

• Kurdistan Regional Government (KRG)-controlled parts of Iraqi Kurdistan are estimated to contain around 45 billion barrels of oil, making it the sixth largest reserve in the world. Extraction of these reserves began in 2007. Gas and associated gas reserves are in excess of 2,800 km3. Notable companies active in Kurdistan include Exxon, Total, Chevron, Talisman Energy, Genel Energy, Hunt Oil, Gulf Keystone Petroleum, and Marathon Oil. In July 2012, Turkey and the Kurdistan Regional Government signed an agreement by which Turkey will supply the KRG with refined petroleum products in exchange for crude oil.

• Kirkuk Field is an oilfield near Kirkuk, Iraq. It was discovered by the Turkish Petroleum Company at Baba Gurgur in 1927. The oilfield was brought into production by the Iraq Petroleum Company in 1934. It has ever since remained the most important part of northern Iraqi oil production with over 10 billion barrels of proven remaining oil reserves in 1998. After about seven decades of operation, Kirkuk still produces up to 1 million barrels per day, almost half of all Iraqi oil exports. Oil from the Kirkuk oilfield is now exported through the Kirkuk-Ceyhan Oil Pipeline, which runs to the Turkish port of Ceyhan on the Mediterranean Sea.

On 11 July 2014 Kurdistan Regional Government forces seized control of the Kirkuk mega oilfield, together with the Bai Hassan field, prompting a condemnation from Baghdad and a threat of “dire consequences,” if the oilfields were not returned to Iraq’s control.

That’s right, Iraq lost – control over – about half of its oil exports one month ago. To an army that belongs to that part of the population the President belongs to!

And that takes us right back to why the US is meddling in Iraq. And Ukraine too, of course. Kirkuk is in Kurdish hands now, and it must be a nightmare for all of those oil companies active in Kurdistan to even ponder the IS conquering those parts of Kurdish Iraq that they are active in. A nightmare, but by no means impossible. They’re just about literally on the doorstep:

Oil and gas were always important, they’ve been the reason for the majority of all US and European wars and invasions of the past 150 years, But control over fossil fuels has gotten a lot more important recently, ever since everyone (well, everyone …) has acknowledged that conventional peak oil indeed happened in 2005, and that shale oil and gas won’t last long (less people understand this last bit, admittedly, but TPTB do).

The fight over oil has now literally become the fight for power, as I’ve said more than once recently. That is what we see develop here. The 2003 invasion of Iraq gave Big Oil access to a lot of oil and gas, but it also left behind an unparalleled chaos. And now they’re forced back in. I see Washington plan a lot of mayhem and chaos, but I doubt they wanted this at this particular point in time. This is not a powder keg, this is Pandora’s box.

But there’s no way back. The US doesn’t want Putin in control of Russian resources, even though, as I said yesterday, they’re going to need him dearly if they want to prevent Iraq from blowing up in their faces, and they don’t want the Islamist State in control of 45 billion+ barrels of oil in Kurdistan and the greater Iraq area.

By the by, when I read reports of children being buried alive etc., I think of patterns. These accusations are always used against new enemies. I don’t know how out there the IS is, but it does make me wonder.

In my view, America doesn’t sufficiently understand the region, and therefore chooses the Wrong Friends, Wrong Enemies, Wrong Fights . And I think that is due to pure American hubris and arrogance.

Washington thinks it has the by far best, most expensive, most advanced army, and that that alone will make it ultimately victorious no matter what happens. So why then pay too much attention to what happens? What that idea disregards is that the US hasn’t actually won a war or an invasion since 1945, though it had the numero uno army the whole time.

Creating chaos may be a tried and tested approach, but not if you yourself get confused and no longer oversee what is going on. Then you’re merely yet another part of the chaos.

The only way left to go then is ever heavier weapons, trying to spread ever more death and fear among the ‘enemy’. But Washington doesn’t even always now who the enemy is. And if you don’t know that, you can’t win.

Still, we’re in it for keeps. Here are two things from a few days ago that tell you why; they come on top of countless other examples The Automatic Earth has served you lately. BusinessWeek:

China’s 2020 Shale Gas Production Target Cut In Half

Tapping China’s vast shale-gas reserves has proved more difficult than government planners in Beijing once hoped. In 2012, China’s National Energy Administration projected that, by 2020, from 60 billion to 80 billion cubic meters (bcm) of domestic shale gas would be pumped annually. Earlier this week the country’s energy chief, Wu Xinxiong, slashed the goal in half, to 30 billion bcm by 2020.

In the US, the Monterey play was cut by 90-odd%. In Poland, no.1 EU shale prospect, close to nothing was ever found. China’s just getting started cutting expectations and targets.

And from the Wall Street Journal:

Statoil Fails to Make Commercial Discoveries in Arctic Drilling Campaign

Norwegian energy company Statoil said Thursday it was disappointed by the results of an Arctic drilling campaign in the Barents Sea after making no commercial discoveries of oil or gas. Statoil said it had ended its three-well drilling campaign in the Hoop area, and the Apollo, Atlantis and Mercury wells all contained noncommercial volumes of oil and gas.

Shell left the Arctic. Statoil now does. That leaves Exxon, in its recently announced sanction-busting deal with Russia.

Still, even that doesn’t leave much hope, as becomes clear – once again – in the following by Ambrose Evans Pritchard, who’s late to the game in reporting on the same EIA review we covered two weeks ago in Say Bye To The Bubble with help from Wolf Richter, information we expanded on last week in Debt and Energy, Shale and the Arctic.

But hey, it’s Ambrose, and he does numbers well.

Oil And Gas Company Debt Soars To Danger Levels To Cover Cash Shortfall

• The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly.

• … the shortfall between cash earnings from operations and expenditure – mostly CAPEX and dividends – has widened from $18bn in 2010 to $110bn during the past three years. [..] .. to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011.

• The agency, a branch of the US Energy Department, said the increase in debt is “not necessarily a negative indicator”

• … “continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development”.[..] upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9pc in 2012, and 11pc last year. Upstream costs rose by 12pc a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology.

• Global output of conventional oil peaked in 2005 despite huge investment.

• … the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120 ..

• Analysts are split over the giant Petrobras project off the coast of Brazil, described by Citigroup as the “single-most important source of new low-cost world oil supply.” The ultra-deepwater fields lie below layers of salt, making seismic imaging very hard. They will operate at extreme pressure at up to three thousand meters, 50pc deeper than BP’s disaster in the Gulf of Mexico.

• Petrobras is committed to spending $102bn on development by 2018. It already has $112bn of debt. The company said its break-even cost on pre-salt drilling so far is $41 to $57 a barrel. Critics say some of the fields may in reality prove to be nearer $130. Petrobras’s share price has fallen by two-thirds since 2010.

• … global investment in fossil fuel supply rose from $400bn to $900bn during the boom from 2000 and 2008, doubling in real terms. It has since levelled off, reaching $950bn last year. [..] Not a single large oil project has come on stream at a break-even cost below $80 a barrel for almost three years.

• … companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120.

• The IEA says companies have booked assets that can never be burned if there is a deal limit to C02 levels to 450 (PPM), a serious political risk for the industry. Estimates vary but Mr Lewis said this could reach $19 trillion for the oil nexus, and $28 trillion for all forms of fossil fuel.

• “Exxon must be doing a lot of soul-searching as they get drawn deeper into this,” said one oil veteran with intimate experience of Russia. “We don’t think they ever make any money in the Arctic. It is just too expensive and too difficult.”

“It is just too expensive and too difficult.”. Or as we say where I come from: There Is No There There.

Oil companies already lose $110 billion a year (aka ‘the shortfall between cash earnings from operations and expenditure’). They’re now committing that exact same amount to new projects, money they’ll also have to borrow. What if interest rates go up to 5%? Will they still drill? Or are we going to take someone else’s oil by force?

As I said, hardly new for Automatic Earth readers, but this is so important in understanding what is happening geo-politically these days that it bears repeating. There is no way back. Oil has become ultimate power. And will lead to the ultimate fight. Having bigger and better guns and tanks won’t win that fight.

But Washington, by the look of things, doesn’t seem to understand that. Arrogance and hubris tend to be costly. In ultimate fighting, they can be deadly. America’s not exactly making a lot of friends these days, and the ones they do make are the wrong friends. Even the New York Times now reports on the fine folk gunning down the people of east Ukraine. Will Putin let them do as they please? And if not, what will “we” do?

Oil And Gas Company Debt Soars To Danger Levels To Cover Cash Shortfall (AEP)

The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106bn in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time. They also sold off a net $73bn of assets. This is a major departure from historical trends. Such a shortfall typically happens only in or just after recessions. For it to occur five years into an economic expansion points to a deep structural malaise. The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568bn over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly.

Companies have exhausted the low-hanging fruit and are being forced to explore fields in ever more difficult regions. The EIA said the shortfall between cash earnings from operations and expenditure – mostly CAPEX and dividends – has widened from $18bn in 2010 to $110bn during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39bn on repurchases since 2011. The agency, a branch of the US Energy Department, said the increase in debt is “not necessarily a negative indicator” and may make sense for some if interest rates are low. Cheap capital has been a key reason why US companies have been able to boost output of shale gas and oil at an explosive rate, helping to lift the US economy out of the Great Recession.

The latest data shows that “tight oil” production has jumped to 3.7m barrels a day (b/d) from half a million in 2009. The Bakken field in North Dakota alone pumped 1m b/d in May, equivalent to Libya’s historic levels of supply. Shale gas output has risen from three billion cubic feet to 35 billion in just seven years. The EIA said America will increase its lead as the world’s largest producer of oil and gas combined this year, far ahead of Russia or Saudi Arabia. However, the administration warned in May that “continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development”. It said that upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9pc in 2012, and 11pc last year. Upstream costs rose by 12pc a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology.

Read more …

China’s 2020 Shale Gas Production Target Cut In Half (BW)

Tapping China’s vast shale-gas reserves has proved more difficult than government planners in Beijing once hoped. In 2012, China’s National Energy Administration projected that, by 2020, from 60 billion to 80 billion cubic meters (bcm) of domestic shale gas would be pumped annually. Earlier this week the country’s energy chief, Wu Xinxiong, slashed the goal in half, to 30 billion bcm by 2020. According to the U.S. Energy Information Administration, China’s holds the world’s largest reserves of theoretically recoverable shale gas. But much of it is locked in mountainous regions in western China.

While China’s leaders – concerned about steeply rising energy demand accompanying rapid urbanization – dearly want to emulate the U.S.’s shale-gas boom, it turns out Americans have several practical advantages. For starters, the U.S. shale-gas revolution kicked off in fairly accessible regions: the flatlands of Texas, North Dakota, and Pennsylvania. So far, explorations in China have identified only one clearly promising shale play: Fuling shale gas field, near the western megalopolis of Chongqing. Sinopec, which controls the Fuling field, projects that its annual shale gas production will reach 5 bcm by 2015 and 10 bcm by 2017. With no other comparable sites yet identified, it’s not clear where the other 20 bcm may come from. While Sinopec is currently at the forefront of China’s shale-gas development, two foreign companies, Royal Dutch Shell and Hess, have secured production-sharing contracts for other potential sites.

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Iraqi PM Maliki Digs In, Sends Loyal Forces Into Baghdad (Reuters)

Iraqi Prime Minister Nuri al-Maliki was battling to keep his job on Monday, deploying forces across Baghdad as some parliamentary allies sought a replacement and the United States warned him not to obstruct efforts to form a new government. Widely accused of a partisan obstinacy that has fuelled the communal violence tearing Iraq apart, the Shi’ite Muslim premier went on television late on Sunday to denounce the ethnic Kurdish president for delaying the constitutional process of naming a prime minister following a parliamentary election in late April. However, President Fouad Masoum won a rapid endorsement from Washington. With Sunni fighters from the Islamic State making new gains over Kurdish forces north of Baghdad, the United States renewed its call for Iraqis to form a consensus government to try and end bloodshed that has prompted the first U.S. air strikes since the U.S. occupation ended in 2011.

And in pointed remarks aimed at Maliki, Secretary of State John Kerry said: “The government formation process is critical in terms of sustaining stability and calm in Iraq, and our hope is that Mr. Maliki will not stir those waters. “There will be little international support of any kind whatsoever for anything that deviates from the legitimate constitution process that is in place and being worked on now.” Complicating efforts to propose a replacement from among fellow Shi’ites, who appear to have some support from both the country’s leading cleric and from the Shi’ite establishment of neighbouring Iran, the country’s highest court ruled that Maliki’s State of Law bloc is the biggest in the new parliament. That, a senior Iraqi official said, was “very problematic” for attempts to have President Masoud offer the premiership to an alternative candidate to Maliki – an alternative that one senior member of his party said had been close to being chosen.

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US Begins Directly Arming Kurdish Forces In Iraq (IBT)

The administration of US president Barack Obama has begun directly providing weapons to Kurdish forces who have started to make gains against Islamic militants in Iraq. The US previously insisted on selling arms only to the Iraqi government. US officials say the administration is close to approving plans for the Pentagon to arm the Kurds. Recently the US military has been helping facilitate weapons deliveries from the Iraqis to the Kurds, who had been losing ground to the Islamic State militant group, formerly known as Isis. The move to directly aid the Kurds underscores the level of US concern about the Islamic State militants’ gains in the north, and reflects the persistent administration view that the Iraqis must take the necessary steps to solve their own security problems. A senior US state department official would only say that the Kurds are “getting arms from various sources. They are being rearmed”. To bolster that effort, the administration is also very close to approving plans for the Pentagon to arm the Kurds, a senior official said.

In recent days, the US military has been helping facilitate weapons deliveries from the Iraqis to the Kurds, providing logistic assistance and transportation to the north. The move comes as Iraqi prime minister Nuri al-Maliki is battling to keep his job today, deploying forces across Baghdad as some parliamentary allies sought a replacement and the United States warned him not to obstruct efforts to form a new government. Widely accused of a partisan obstinacy that has fuelled the communal violence tearing Iraq apart, the Shi’ite Muslim premier went on television late on yesterday to denounce the ethnic Kurdish president for delaying the constitutional process of naming a prime minister following a parliamentary election in late April. However, president Fouad Masoum won a rapid endorsement from Washington. With Sunni fighters from the Islamic State making new gains over Kurdish forces north of Baghdad, the United States renewed its call for Iraqis to form a consensus government to try and end bloodshed that has prompted the first US air strikes since the US occupation ended in 2011.

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US Pulls Support for Iraqi PM Maliki as Militants Gain (Bloomberg)

U.S. Secretary of State John Kerry pulled support from Iraq’s Prime Minister Nouri al-Maliki today, telling him not to hinder the political process amid reports that Islamic State militants had seized a town northeast of Baghdad.Kerry said that the U.S. was backing Iraq’s President Fouad Masoum and that Maliki wasn’t even among the three candidates Iraqis wanted as the next prime minister.“We stand absolutely, squarely behind President” Fouad Masoum, Kerry said in Sydney. “He has the responsibility for upholding the constitution of Iraq, he is the elected president, at this moment Iraq has clearly made a statement that they are looking for change.”

Political haggling in Iraq is hurting government attempts to curb advances by an al-Qaeda breakaway group that ravaged the north of the country and drew U.S. air strikes. U.S. President Barack Obama has said that greater U.S. assistance in pushing back Islamic State forces would only come if a more inclusive government was formed that didn’t marginalize Sunni and other minorities.While U.S. strikes have slowed Islamic State advances in the north, the group still holds vast swaths of territory in Syria and Iraq, including key installations such as dams, military outposts and Iraq’s biggest northern city. Kurdish forces on Sunday were able to retake the towns of Makhmour and Gwer, south of Erbil, where militants retreated after U.S. airstrikes, according to the Kurdish news agency Rudaw, citing officials.

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Blowback coming right up.

New York Times Discovers Ukraine’s Neo-Nazi Shock Troops In Action (Parry)

The New York Times reported almost in passing on Sunday that the Ukrainian government’s offensive against ethnic Russian rebels in the east has unleashed far-right paramilitary militias that have even raised a neo-Nazi banner over the conquered town of Marinka, just west of the rebel stronghold of Donetsk. That might seem like a big story – a U.S.-backed military operation, which has inflicted thousands of mostly civilian casualties, is being spearheaded by neo-Nazis. But the consistent pattern of the mainstream U.S. news media has been – since the start of the Ukraine crisis – to white-out the role of Ukraine’s brown-shirts. Only occasionally is the word “neo-Nazi” mentioned and usually in the context of dismissing this inconvenient truth as “Russian propaganda.” Yet the reality has been that neo-Nazis played a key role in the violent overthrow of elected President Viktor Yanukovych last February as well as in the subsequent coup regime holding power in Kiev and now in the eastern offensive. On Sunday, a NYT article by Andrew E. Kramer mentioned the emerging neo-Nazi paramilitary role in the final three paragraphs:

“The fighting for Donetsk has taken on a lethal pattern: The regular army bombards separatist positions from afar, followed by chaotic, violent assaults by some of the half-dozen or so paramilitary groups surrounding Donetsk who are willing to plunge into urban combat. “Officials in Kiev say the militias and the army coordinate their actions, but the militias, which count about 7,000 fighters, are angry and, at times, uncontrollable. One known as Azov, which took over the village of Marinka, flies a neo-Nazi symbol resembling a Swastika as its flag. “In pressing their advance, the fighters took their orders from a local army commander, rather than from Kiev. In the video of the attack, no restraint was evident. Gesturing toward a suspected pro-Russian position, one soldier screamed, ‘The bastards are right there!’ Then he opened fire.”

In other words, the neo-Nazi militias that surged to the front of anti-Yanukovych protests last February have now been organized as shock troops dispatched to kill ethnic Russians in the east – and they are operating so openly that they hoist a Swastika-like neo-Nazi flag over one conquered village with a population of about 10,000. Burying this information at the end of a long article is also typical of how the Times and other U.S. mainstream news outlets have dealt with the neo-Nazi problem in the past. When the reality gets mentioned, it usually requires a reader knowing much about Ukraine’s history and reading between the lines of a U.S. news account.

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Never a dull moment for Vladimir V.

Putin in Push to Douse New Discord on Russia’s -Other- Doorstep (Bloomberg)

Russian President Vladimir Putin, staring down the deepening unrest in Ukraine, tried the role of peacemaker by brokering the first meeting in nine months between the leaders of Armenia and Azerbaijan following the deadliest clashes between the ex-Soviet republics in 20 years. The talks, which yielded little beyond a promise of more negotiations, showed Putin playing statesman with a war raging next door in Ukraine, where he’s faced accusations of stoking the conflict. Two days of meetings at his retreat in Sochi were marked by another fatality on the frontlines of the disputed region of Nagorno-Karabakh, with an Azeri soldier killed late on Aug. 9 by Armenian fire, according to the Defense Ministry in Baku. That brought the death toll to 24 since July 26.

“No way do they need a war in Karabakh,” Thomas de Waal, senior associate at the Carnegie Endowment for International Peace in Washington, said by e-mail yesterday. “Russia has a strong incentive in preventing a new conflict, as it would cause massive instability in its southern tier. It also has treaty obligations to defend Armenia militarily and would therefore also destroy its carefully developed relationship with Azerbaijan.” Failure to break the deadlock threatens to unleash war in a region where companies led by BP have invested more than $40 billion to develop Azerbaijan’s oil and gas fields. Russia’s role in Ukraine is complicating an effort by Putin to assert his sway in the former Soviet Union, according to Matthew Bryza, the U.S. ambassador to Azerbaijan in 2010-2011. The government in Moscow has repeatedly denied any involvement in the unrest in eastern Ukraine.

[..] The South Caucasus countries, which border Turkey and Iran, signed a cease-fire brokered by Russia in 1994 after more than 30,000 people were killed and more than 1.2 million were displaced. Armenians took over Nagorno-Karabakh and seven surrounding districts from Azerbaijan in a war after the Soviet breakup in 1991. The truce left 20,000 Armenian and Azeri troops, dug into World War I-style trenches sometimes only 100 meters (330 feet) apart, according to the Carnegie Endowment for International Peace. The conflict is part of the region’s “Soviet legacy,” Putin said as he opened negotiations yesterday. “We must show patience, wisdom and respect for each other to find a solution,” he said. The Azeri and Armenian leaders traded accusations in Putin’s presence, blaming each other for violating international agreements on Karabakh. Even so, both presidents said they support a peaceful solution to the conflict and praised Putin for his mediation efforts. About 700,000 Azeris were forced to leave the districts, 200,000 Azeris left Armenia and more than 360,000 Armenians fled Azerbaijan.

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Oh yes, it will.

Brace For Japan GDP, It’s Going To Be Ugly (CNBC)

Japan’s economy is expected to have lost all the ground it gained earlier this year during the second quarter as the April consumption tax hike appears to have thrown the fragile recovery off its tracks. Asia’s second-largest economy, which is set to release gross domestic product (GDP) data on Wednesday, shrunk an annualized 7.1% in the April to June quarter, according to a Reuters poll, down sharply from a 6.7% gain in the previous three months. “The consumption tax hike that started in April will have a broad-based impact on demand components with consumption, residential investment and capex [capital expenditure] in particular expected to decline sharply,” Yoshiro Sato, economist at Credit Agricole wrote in a note. “That said, it is inevitable given the tax hike that the economy will contract following the robust growth thanks to the front-loaded increase in demand,” he said.

In April, Japan raised its consumption tax to 8% from 5%, the first increase in 17 years, as part of efforts to rein in mounting public debt. When Japan last lifted the sales tax to 5% from 3% in 1997, the economy fell into recession not too long afterwards. A raft of disappointing economic data in recent weeks has raised concerns that the April sales tax hike could prove more damaging than initially thought. Industrial output, for example, fell 3.3% on month in June – the fastest rate since the devastating earthquake and tsunami in March 2011 as companies scaled back production to offset a build-up in inventories.

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Costly, Angela?

German Economy Backbone Bending From Lost Russia Sales (Bloomberg)

MWL Apparate Bau, based in the eastern German town of Grimma, has relied on strong ties with Russia to bolster business. Today, those links don’t mean much. The maker of equipment such as pressure vessels and hot water tanks for the chemical and petrochemical industries has seen a “significant” decline in orders in the last six months due to the crisis, sales chief Reinhard Weber said. The company has annual revenue of about €20 million ($27 million). “There are two contracts from Russia we didn’t get and we think that’s for political reasons,” Weber said in a telephone interview. “They’re afraid of sanctions being extended — that they will make an order and that we won’t be able to fulfill it because of political decisions in Germany or Europe.”

MWL is one of many businesses in Germany’s Mittelstand, the thousands of small- and medium-sized companies that form the backbone of Europe’s largest economy, that are already getting pinched as Russian customers put off purchases. With the crisis now intensifying through deeper European Union and U.S. sanctions and retaliatory measures from Russia banning EU and U.S. food imports, they’re preparing for an even bigger hit. Take Amandus Kahl. The maker of food processing and recycling machinery near Hamburg had expected to bring in about €10 million in revenue this year from Russia. Sales to the country “have pretty much evaporated because our clients can’t get financing,” Rochus Mecke, a Kahl’s sales director, said in an interview. “We still get inquiries, but it’s only inquiries.”

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Yup. No matter who you define it.

Sanctions Will Deepen Euro Area Deflation (CNBC)

France’s powerful farm lobby asked last Friday for an immediate removal from the market of all EU fruits and vegetables that can no longer be exported to Russia. A similar action was urged with regard to milk, milk products, meat and fish. The fear is that excess supply would crush food prices and a heavily subsidized EU farm sector. The European media are abuzz about sanction effects. Dutch News.nl, for example, reported today (Sunday, August 10) that last Friday one kilogram (2.2 pounds) of spinach in the city of Zaltbommel was down to €0.30 from €1.1 when the sanctions hit the market on Wednesday, August 6. At this writing, an expert group is working at the EU Commission to assess the impact of this initial round of economic warfare with Russia. A broader group of national farm officials is expected to meet next Thursday, and Brussels is promising that “up to €400 million” could be paid out to compensate the sanctions-hit farmers.

Looking at all this, several things come to mind. First, this should have come as no news to the EU. Russia has been repeating for months that it would respond to Western sanctions. After the third wave of crippling measures directed at several sensitive sectors of Russian economy in mid-July, Moscow warned that it would target the EU farm business, and that further action will affect trade in automobile, aircraft and shipbuilding industries. Russia delivered on the first part of its counter-sanctions on August 6, 2014. In spite of all the warnings, the EU now seems totally surprised and indignant that Russia dared to respond. That is an unfortunate lack of EU preparedness to play this deadly serious sanctions game. As a result, a number of countries (Finland, Poland and some Baltic states) have already asked Brussels to compensate them for their trade losses.

Second, the compensation of “up to $400 million euros” promised by Brussels is wholly inadequate. Russia is the second-largest market for EU farm exports. It takes 10% of EU farm products representing annual sales of €12 billion. France alone accounts for about €1 billion of that export trade with Russia. No wonder the influential German and French media are now turning on their governments. Witnessing the sinking of their equity market (down 11% since its peak in late June), the Germans are reminding themselves of how much their government ignored the teachings of their own war strategist (General Carl von Clausewitz) about the management of hostilities. And in an apparent dig at Chancellor Merkel, her Foreign Minister Steinmeier complained recently that “sanctions alone are not a policy.” The raw nerve was apparently also touched by the news last Friday that the company Rheinmetall is now asking the government to use taxpayers’ money to compensate it for a €100 million contract it was forced to cancel with Russia.

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They’ll step out soon.

Punishing Russia Provokes Finnish Dismay as Fallout Seen Unfair (Bloomberg)

After backing the European Union in expanding sanctions against Russia, Finland is now regrouping to consider what it describes as the disproportionate fallout of the crisis on its own economy. No other euro nation is as hard hit by the aftermath of the crisis in Ukraine as Finland, trade figures for the single currency bloc show. Prime Minister Alexander Stubb last week underscored the need for “solidarity” in the EU, making clear he expects any measures to “treat EU members similarly. If the impact isn’t equal, we’ll consider what kind of solutions we will seek.” The 28-nation EU has repeatedly struggled to speak with one voice, from how to handle the debt crisis and most recently with its economic response to the political turmoil at its eastern border.

Finland already has a proven track record of successfully carving out special rights within European accords. During the sovereign debt crisis, Finland was the only country to seek and obtain compensation for its contribution to bailouts in the form of collateral. “It creates an image of a country that engages in politics very much from its own perspective rather than a common European point of view,” Pasi Kuoppamaeki, chief economist at Danske Bank A/S in Helsinki, said by phone. “Of course, many others do that too.” In a counter-move to western sanctions, President Vladimir Putin slapped import bans on an array of foods last week, compounding the economic pain for Finland of faltering Russian demand and a weaker ruble. With 14% of Finland’s trade coming from Russia, those developments are exacerbating the Nordic country’s efforts to exit its second recession since 2008. “I hope the sanctions aren’t broadened,” Stubb told reporters on Friday. “This isn’t a trade war.”

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Europe? Where’s that?

Europe’s Growth Engine Stutters as Spain Beats Germany (Bloomberg)

Germany probably underperformed Spain last quarter for the first time in more than five years as the euro-area recovery almost ground to a halt. After leading the currency bloc out of its longest-ever recession last year, Europe’s largest economy contracted in the three months through June, according to a Bloomberg News survey. The downturn in the region’s powerhouse highlights the fragility of a revival that European Central Bank President Mario Draghi has described as modest and uneven. The 18-nation euro area is struggling to boost growth and inflation even amid unprecedented ECB stimulus, with Draghi citing inadequate structural reforms as a key reason. While the German data is distorted by mild winter weather that front-loaded output earlier in the year, Bundesbank President Jens Weidmann has warned the country must also adjust or risk losing its role as a growth engine. This week’s reports “will probably underline that the problems in the euro zone have moved north,” said Ralph Solveen, an economist at Commerzbank AG in Frankfurt.

“The weak recovery will definitely provide the doves in the ECB Governing Council with a weighty argument to demand further expansionary measures.” German GDP shrank 0.1% in the three months through June, the first contraction since 2012, according to the median estimate in the Bloomberg survey. The economies of the euro area and France grew 0.1%, separate surveys show. The reports will be published on Aug. 14 along with those for the Netherlands, Austria and Portugal. Spain posted an expansion of 0.6% in the same period, the National Statistics Institute said last month. Italian GDP fell 0.2%, after a 0.1% decline in the previous quarter, taking the country into its third recession since 2008. Draghi took aim at Italy last week for lack of progress in reforms. “It’s pretty clear that the countries that have undertaken a convincing program of structural reforms are performing better, much better, than the countries that have not done so,” he said on Aug. 7 in Frankfurt after the ECB left interest rates unchanged at record lows.

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Sounds good, will look awful.

PM Matteo Renzi Defends Pace Of Italian Reform (FT)

Matteo Renzi, Italy’s prime minister, says the eurozone’s third-largest economy is on track to hit its EU-mandated budget targets this year despite falling back into recession in the second quarter and, in a pugnacious interview with the Financial Times, defended the speed at which his reforms are moving. Mr Renzi, speaking in the prime minister’s office in Rome, rejected suggestions made by European Central Bank president Mario Draghi last week that the EU should intervene in countries where reforms were not being implemented fast enough to spur economic growth. “I agree with Draghi when he says that Italy needs to make reforms but how we are going to do them I will decide, not the Troika, not the ECB, not the European Commission,” he said. “I will do the reforms myself because Italy does not need someone else to explain what to do.” On Wednesday it was revealed that Italy unexpectedly fell back into recession in the second quarter for the third time since 2008.

The economy shrank 0.2% quarter-on-quarter between April and June, after contracting 0.1% in the first three months of the year, having only briefly emerged from two years of recession at the end of 2013. Economists have said the fall in gross domestic product may result in the general government budget deficit breaching the EU’s 3% of GDP threshold for 2014. Fabio Fois, an economist at Barclays in Milan, expects the deficit will pass the 3% limit unless the government cuts spending by between €1.2bn and €3.2bn. Mr Renzi, who took power in a party coup in February and whose centre-left democratic party won a landslide victory in the European elections in May with an unprecedented 40% of the vote, vowed to take personal control of Italy’s ongoing spending review to ensure compliance with the EU targets. “I have absolutely no intention of breaking the 3% ceiling. We hope to have better [growth] figures in the second half and as a result will be at 2.9% [of GDP].

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Struggling to make it all look rosy?

ECB Struggling To Process Banks’ Stress-Test Data (MarketWatch)

The European Central Bank is having problems processing the large amount of data it receives from banks for the industry’s current health check of the industry, according to a report in the German media. The ECB has told Germany’s Bundesbank that it is “technically unable” to handle the adjusted data sets it had previously ordered banks to submit for the stress test, German weekly Euro am Sonntag reports, citing an email sent by the German central bank to domestic lenders. It added the ECB now wants banks to resubmit the data in a template format. A spokesman for the ECB said the “comprehensive assessment is on track to be concluded as planned, with results in the second half of October.” He added the ECB has been engaging with the banks and is refining its approach “to ensure we manage the process as effectively as is possible for all involved” where appropriate.

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Just step into the shadows.

Chinese Banks Get Serious About Risk Of Bad Debts (Reuters)

Chinese banks are scrambling to get on top of bad debts they have downplayed for years, cutting off riskier borrowers, further tightening lending terms and, in one case, deploying teams of investigators to assess the risk of loan defaults. China’s banks keep reporting bad loan levels well below what most analysts consider realistic, but their recent actions suggest the slowing economy may be squeezing borrowers and lenders harder than thought only a few months ago. China’s fifth-largest lender, Bank of Communications, assembled research teams last month to look over the assets of troubled borrowers in Zhejiang province, according to bank sources and an internal document. The province is a hotbed of China’s credit stress. BoCom denied that special teams had been set up or that there was any surge in potential bad loans in an email to Reuters. The bank said it had always placed great importance in its risk control efforts.

Bankers from other major listed lenders said they were further cutting lending to riskier borrowers, in particular smaller private companies. “We’re lending almost exclusively to state-owned enterprises in our department at the moment, because it’s just seen as the least risky,” said a senior loan officer at the Bank of China. The banker, who would not be named because he is not authorized to speak to the media, added that the bank had also raised the bar for state-owned firms, in particular by demanding more collateral. Lawyers for banks say increasing numbers of transactions fall through because of lenders’ last-minute risk worries. A senior lawyer, who works for Industrial and Commercial Bank of China among others, said only a third of the financing deals she had been asked to work on were actually completed this year. This compares to 70% in the last two years, she said. [..]

In March, Reuters reported that Chinese banks had become unsettled by some highly publicized defaults and were toughening terms for highly indebted borrowers or those plagued by overcapacity. Now it appears that banks are moving one step further, effectively cutting off many private firms from financing. Regulators may welcome signs that banks have become more diligent in assessing risk, but it is bad news for policymakers and China’s near-term economic prospects. Beijing has been counting on consumption and a services sector dominated by private firms to take up the slack as it aims to cut industrial overcapacity and China’s over-reliance on large state-financed investment projects.

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Lots.

China Property Defaults Seen as Financing Stresses Mount (Bloomberg)

China’s slumping property market is fueling speculation the industry is set for a shakeout as small developers face difficulty raising funds to pay off debt. Yield premiums on Chinese real-estate bonds denominated in dollars have jumped 35 basis points this month to 582 basis points over Treasuries, the sharpest increase among emerging Asian countries, according to Bank of America Merrill Lynch indexes. That compares with a 19 basis-point advance for Indonesian builders. Moody’s Investors Service and Standard & Poor’s said some smaller Chinese developers may default in the second half amid falling sales and shrinking access to credit. China’s real-estate industry poses the biggest near-term risk to growth in the world’s second-largest economy after new home prices dropped in the most cities in two years in June, according to JPMorgan Chase & Co. While government steps to ease property curbs helped builder bonds rally in July, they’re giving up those gains ahead of housing-price data due next week.

“The operating environment is still tough for Chinese developers,” said Franco Leung, a senior analyst in Hong Kong at Moody’s. “Banks in China have become more selective in lending to developers. Those weaker developers still face liquidity pressure.” “Given the fragmented nature of the property market in China and the sheer number of developers, it wouldn’t be surprising if there are news of developers being in financial difficulty or of outright defaults,” said Swee Ching Lim, a Singapore-based credit analyst at Western Asset Management Co. Home prices fell in 55 of 70 cities in June from May, the National Bureau of Statistics said on July 18, the most since January 2011 when the government changed the way it compiles the data. The inventory of unsold new homes in 20 large cities jumped to an average equivalent of more than 23 months of sales in June, according to Shenzhen World Union Properties Consultancy Inc. The floor space of unsold new apartments nationwide as of June 30 surged 25% from a year earlier, government data show.

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What can I say? Farrell!

100% Risk Of 50% Crash If Hillary Clinton Wins In 2016 (Paul B. Farrell)

OK, we get it. Everybody gets it. Big crash coming. Been trending all over the news. For months. Blogs. Cable. Networks. Social media. Hour after hour. Minute after minute. We get it. Crash ahead. Third big one of the century. Bet on it. But so what? Hillary? Jeb? Chris? Doesn’t matter. Markets don’t care who wins. Big crashes happen, about every eight years. Everybody knows it. Nobody really cares. Why? We love playing the game of musical chairs, in the race to the 2016 presidency. And everyone’s playing. 95 million Main Street investors. Millions of Wall Street pros. Super Rich billionaires, private-equity firms, hedge funds, pension managers. Every CEO, trader, adviser, broker, fund. Everybody loves playing with hundreds of trillions. Everybody. Yes, the market’s going to crash. Again. Crashes are part of the game. In fact, knowing a big crash is coming makes the game more exciting. We’re playing to squeeze out another point, maybe time our exit before the inevitable collapse.

The bull run is up over 250% since 2009. Maybe it’s time to get out. But the economy’s looking up, so we’ll risk going for more gains, more thrills, racing to the 2016 top. This new musical chairs game reminds us of that upbeat bank CEO in our favorite Robert Mankoff New Yorker cartoon: The CEO is at a podium motivating shareholders. Imagine Michael Douglas in Oliver Stone’s classic “Wall Street”: “While the end-of-the-world scenario will be rife with unimaginable horrors, we believe that the pre-end period will be filled with unprecedented opportunities for profit.” That’s the spirit driving another exciting game of musical chairs till 2016. Next crash: $10 trillion like dot-com 2000? Subprime 2008? Play the game .. How big a drop? Truth is, nobody really knows. But everybody has an opinion. First using this or that favorite theory, cycle, index, data, algorithm. Then they guess. And millions of investors pile in the trending herd, all chasing the same news media, alerts, opinions, guesses. As gigabytes of data endlessly overload us all day, every day, 24/7.

How big? Even the pros don’t really have a clue. They make consensus guesses. All over the map. This one up. Next down. A roller coaster. Not much help in today’s algorithm driven news business that’s more like a scattergun when we wish we had a sniper rifle. All that in a mess of contradictions hidden in a war zone of mental land mines. But we are absolutely certain something is coming. Bigger than the Silicon Valley’s dot-com crash after the 2000 millennium celebrations. That triggered a 30-month recession. Bigger than the 2008 Wall Street banks subprime credit collapse that put America in virtual bankruptcy. Does anyone really care, about the future? No, only today. What’s trending now? Our brains have lost the capacity to think long-term. We drift from trend to trend: The latest buzz. Rarely going deep, never into the future. Nor ask the moral questions, what’s the right thing to do? What counts: Today’s trends. That’s all. We’re playing the musical chairs game.

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Rat race to the bottom.

Public Pensions Cannot Stop Chasing Performance (BW)

Two basic principles of investing hold up remarkably well: Past results really don’t predict future performance, and high fees eat away at your returns. Smart investors don’t chase performance (as much as they can help themselves) and keep costs to a minimum. Unfortunately for taxpayers, the experts who run public pension funds aren’t following these rules. What’s more, they have little incentive to start.First, the good news: Public pensions in California, Ohio, and New Jersey have been reducing their investments in hedge funds, noting high fees and poor performance, the Wall Street Journal reported. The Los Angeles Fire and Police fund invested $500 million in a hedge fund that returned less than 2% over the last seven years; the fund had comprised just 4% of Fire & Police’s portfolio but 17% of investment fees paid.

The pension plans reconsidering these high-fee, low-performance investments include those with allocations to hedge funds ranging from 1.6% to 15% of assets, according to the Journal. What they share, though, is dismal returns: The average hedge fund return for public pensions was 3.6% for the three years ended March 31, a period when returns from stocks were up more than 10%. But for all the griping about hedge funds’ high costs and lousy performance, it doesn’t appear pension funds have learned their lesson: They are maintaining their investment in private equity, in some cases, even expanding it. Private equity funds invest in non-publically traded assets; like hedge funds, they also promise higher returns—in exchange for high fees and often more risk. And historically, private equity has been a bust for pensions, too.

Research by economists Josh Lerner, Antoinette Schoar, and Wan Wong found public pensions underperformed in private equity relative to other institutional investors such as endowments, private pensions, and insurance companies. In the period they looked at (funds raised from 1991 to 2001), the pension funds’ private equity investments didn’t do much better than an equity index fund. So why the preference for private equity? It sure looks like performance chasing. According to the Journal, private equity investments returned more than 10% to large pension funds in the last three years. Accordingly, pension funds have dived in.

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Basic Income, citizens’ income. Sounds good to me.

Would A Citizen’s Income Be Better Than Our Benefits System? (Guardian)


Photo: Fraser Gray/Rex Features

One radical suggestion is for everybody to receive a citizen’s income. Under this scheme, waged and unwaged, children and adults, the working aged and pensioner, rich and poor alike would receive the same basic income financed by the phasing out of virtually every tax relief and allowance. Those on benefits would not face high marginal tax rates if they took a job, but merely pay PAYE at the current standard rate of 20% on every pound they earned. Those working 20 hours a week on the minimum wage could work 40 hours a week without losing more than 50% of their extra earnings in lost tax credits. There would be other advantages from such a system. First, it would be universal and hence avoid the stigma attached to benefits. Secondly, people taking a job or starting a business would have the security of knowing that they would still have their citizen’s income if the venture did not work out.

Concerns that a citizen’s income would encourage the idle to sit at home all day watching daytime TV do not appear to be supported by evidence from pilot schemes in other countries. Even so, there would be cases where this did happen and they would doubtless be highlighted as an example of a something-for-nothing culture. Other drawbacks include the failure so far to construct a citizen’s income that obviates the need for housing benefit, and the political difficulty in persuading voters that a millionaire should be getting the same citizen’s income as a milkman. So far support for a citizen’s income is limited to the Green party, although the government’s switch to a flat-rate state pension is a step in that direction. The truth is that no tax and benefit system is perfect. But the one we have is costly, bureaucratic, ineffective – and ripe for reform.

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Australia’s ‘Wait For The Dole’ For Under-30s ‘Deeply Disturbing’ (Guardian)

More than 100,000 young people will have to wait six months for unemployment benefits under the government’s proposed budget measure, with social services advocates warning they face “deeply disturbing” knock-on effects. Briefings given to various groups by the Department of Social Services show that 113,000 people a year aged under 30 will be denied the Newstart and Youth Allowance payments for six months. After this period young jobseekers will have to commit to 25 hours a week in a work-for-the-dole scheme. The government will also require those on unemployment benefits to apply for 40 jobs a month, double the current requirement. The government is facing difficulty in getting Senate support for its changes to the unemployment benefits system. Labor and the Greens are opposed to the changes while Clive Palmer, whose Palmer United party holds three crucial Senate seats, has said the proposals simply punish the jobless, with the majority of unemployed people “already trying desperately to find work”.

The Australian Council of Social Service said the scope of the measure would leave many young people suffering severe monetary and mental distress. “The human impact will be deeply disturbing, as this isn’t a small number of people,” Cassandra Goldie, chief executive of Acoss, told Guardian Australia. “When you look at other places that have experimented this, such as the UK, you see tragic examples of people in deep depression, overwhelmed by a lack of hope. “We should be proud of the social safety net we have in Australia. We shouldn’t be a country where if you can’t get a job you face the prospect of not being able to eat, turn on the light, or losing your housing altogether.” Goldie said the government was misguided if it thought young people were not trying hard enough to find jobs. “At the moment there are 165,000 jobs available out there and 800,000 people looking for work. The competition is very hard, especially for those who face barriers such as discrimination.

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