Oct 212014
 
 October 21, 2014  Posted by at 11:22 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle October 21 2014


Gottscho-Schleisner L Motors at 175th Street and Broadway, NYC Mar 24 1948

Oil Prices Won’t Recover Above $100 – Russian Finance Ministry (RT)
Oil Collapse Raises Risk Of ‘Profit Recession’ (MarketWatch)
How Cheap Oil Could Become a Real Problem for Airlines (BW)
Bond Market Brightest Turn Oil Analysts as Gyrations Mystify (Bloomberg)
“Ending QE Will Plunge US Into Severe Recession” (Zero Hedge)
They Studied Keynes and They’re Doing This. Why Can’t the Fed See It? (Bloomberg)
China GDP Growth Slowest Since Global Crisis (FT)
China Growth Seen Slowing Sharply Over Next Decade (WSJ)
Why Deflation Is So Scary (Yahoo)
Islamic State Earns $800 Million a Year From Oil Sales (Bloomberg)
A Little Volatility Can Be Good for You (Bloomberg)
Forex-Rigging Fines Could Hit $41 Billion Globally (Bloomberg)
How Goldman’s Libya Case Could Disrupt Derivatives (CNBC)
Bank Of England Payment System Crashes Leaving Homebuyers In Limbo (Guardian)
Fed’s Dudley Warns Banks Must Improve Culture or Be Broken Up (Bloomberg)
IBM Is in Even Worse Shape Than It Seemed (BW)
‘Forward Guidance’ Marches Global Economy Backwards (Satyajit Das)
Ukraine And Russia Agree On $385 Gas Price For Winter (RT)
“Anti-Petrodollar” CEO Of French Giant Total Dies In Moscow Plane Crash (ZH)
The Tragedy Of NATO: “Beware Foreign Entanglements” (Mises Canada)
Hobbit Find Rewrites Human History (BBC)

This contradicts a whole lot of western ‘experts’.

Oil Prices Won’t Recover Above $100 – Russian Finance Ministry (RT)

Decreasing oil prices are “inevitable” and the chance they will exceed $100 per barrel is “unlikely” the Russia’s Finance Ministry said. However, the Russian budget can withstand lower prices. “The market is biased in favor of excess supplies. That is why price reduction is inevitable; it will have a structural character. We are unlikely to see prices higher than $100 per barrel in the near future,” Maksim Oreshkin, the head of the Russian Finance Ministry’s strategic planning department told RBC TV in an interview. “In general, the current downward price movement is structural. Investments in oil production have increased dramatically in the past ten years,” Oreshkin said. Russian officials have stressed there will be no sharp rise in Russia’s budget deficit, but the country’s largest bank, Sberbank, says an oil price of $104 is required to balance the 2015 budget. A drop of prices to $80 per barrel could cost Russia 2% of GDP.

The weak ruble will be a buffer to lower oil prices, since costs are in rubles, but revenue in dollars. “The ruble is down which allows Russia to maneuver a bit by making some extra cash from oil sales, since those are done in dollars,” RT correspondent Egor Piskunov reported from Moscow. The Russian state budget is based on oil prices of $96 per barrel, which both Brent and WTI crude fell below in previous days. Last week prices hit a 4-year low, with Brent futures reaching a critical point of $84 per barrel. Just months ago, at the height of the Iraq turmoil, Brent was trading at $116 per barrel. WTI crude, the main North American blend, hit a four-year low dropping below $80 Thursday. Both blends have been falling for the last four months.

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Glad someone brings it up …

Oil Collapse Raises Risk Of ‘Profit Recession’ (MarketWatch)

American drivers are almost giddy over gasoline prices that are now below $3 a gallon in some areas. Investors, however, might want to check themselves, says David Bianco, Deutsche Bank’s top equity strategist. Light, sweet crude traded on the New York Mercantile Exchange has plunged from around $107 a barrel in June to test two-year lows near $80 a barrel. The collapse has prompted Bianco and his team to cut their forecast for S&P 500 fourth-quarter earnings per share by 50 cents to $30.50 and to drop their forecast for full-year 2015 earnings by $3 to $123 a share. That still points to 2015 earnings per share growth of around 4% on expectations global growth will remain underpinned by U.S. growth, which will be enhanced, in part, by stronger consumption aided by cheaper oil. But lower oil prices (Deutsche Bank is now penciling in a 2015 average price of $85 a barrel), will weigh heavily on the energy sector, Bianco said in a note.

Deutsche Bank slashed its forecast for fourth quarter energy earnings by nearly 10% — accounting for almost all of the cut in the bank’s estimate of fourth quarter S&P 500 EPS. Deutsche now sees energy earnings falling 10% in 2015 as well, versus an earlier forecast for a fall of 2%. While it’s no surprise that the energy sector will bear the brunt, plunging oil is also bad news for the industrials and materials sectors. They’ll suffer as energy firms reduce capital spending in the U.S. and worldwide, Bianco says, noting that a third of S&P 500 capital spending comes from the energy sector. Meanwhile, the boost to consumer sector earnings from the lower oil price is small, Bianco says. So is the S&P 500 in danger of suffering a “profit recession?” Probably not, but much depends on the oil price, Bianco writes. He notes that since 1960 there have been only 10 instances when there was a fall in trailing fourth-quarter earnings per share.

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They add flights when oil is cheaper …

How Cheap Oil Could Become a Real Problem for Airlines (BW)

Oil futures have been on a torrid plunge in recent weeks, touching lows below $80 per barrel. Great news for airlines, right? Maybe not. For roughly the past 35 years, inexpensive jet fuel has routinely served as a siren call to airline executives. Cheap fuel spurs more flights and wild grabs for whatever business looks attainable in the travel market. Marginal routes become profitable with lower fuel prices, which, in turn, bolsters the argument that new flights can boost revenues with little cost. Cheap fuel also lets an airline experiment more radically with flight schedules in the bid to swipe market share from rivals. “If it keeps trending lower, it totally changes the economics of the industry again,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. With oil cheaper, Kaplan predicts that many airlines will probably fly their planes in off-peak periods because of the low costs associated with those extra flights. A few additional flights on the weak travel days of Tuesday and Saturday could return to some schedules.

This possibility has some Wall Street analysts in a tizzy, concerned that if oil stays cheap enough for long enough, lower prices will cause airlines to backslide on their new-found religion against deploying too much capacity. “We feel like this industry needs an oil spike now more than ever,” Wolfe Research analyst Hunter Keay wrote last week in a client note. “[C]apacity discipline of late (from some) seems theoretical at best.” Brent crude, the energy index most airline executives monitor for its correlation to jet fuel, has declined 22% this year; settling Friday at $86; a day earlier, the Brent Index scored a four-year-low, under $83. This constitutes a sharp reversal from recent years: After oil spiked to nearly $150 per barrel in July 2008, U.S. airlines radically restructured to try to cope with oil at whatever price it may be. That effort has left high or low oil prices much less important—quick swings either way are now the enemy—while turning expensive oil into somewhat of a barrier for new flying.

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If those guys are the brightest …

Bond Market Brightest Turn Oil Analysts as Gyrations Mystify (Bloomberg)

Following the most turbulent period for U.S. bonds in more than three years, the top strategists are looking less at jobs and manufacturing and more at the price of oil for clues as to what lies ahead. Treasuries gyrated last week, with yields on benchmark 10-year notes at one point falling below 2% for the first time since June 2013, as a tumble in crude sparked concern that the global economy was on the verge of entering a deflationary spiral. Bond traders who wagered that the trillions of dollars in cash pumped into the financial system by major central banks would cause runaway inflation were forced to reverse those bets.

The moves were the latest shock in a year of surprises in the bond market. The consensus estimate among the more than 60 strategists surveyed by Bloomberg in January was for yields to rise in 2014. Instead, they fell. One of the few to get it right was FTN Financial, and its analysts say even after the rally yields are not far from fair value because cheaper energy prices will help curb gains in consumer prices. “There’s a fundamental series of questions about where we go from here,” Jim Vogel, head of interest-rate strategy at Memphis-based FTN, said in an Oct. 16 telephone interview. Vogel, who added that the 21% drop in oil prices since June “took people by surprise,” sent a note to clients last week recommending they “watch for stability in oil positions,” and noting the “strong ties” between the cost of the commodity and the government’s consumer price index.

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Schiff gets a lot more wrong than right, but this is that exception.

“Ending QE Will Plunge US Into Severe Recession” (Zero Hedge)

“Markets are slowly coming to grips with reality is not going to be as easy as everybody thought,” Peter Schiff tells CNBC’s Rick Santelli, noting the pick up in volatility across asset classes recently. What The Fed clearly does not understand, Schiff blasts, is that “you cannot end quantitative easing without plunging the US into a severe recession.” Because of the Fed’s extreme monetary policy and the mal-investment that flows from it, Schiff says, “The US economy is more screwed up now than it’s ever been in history.” Most prophetically, we suspect, Santelli agrees that “a messy exit is a given,” and Schiff believes they know that and that is why QE4 is coming simply “because it hasn’t worked and they can’t admit it’s been a dismal failure.”

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Not sure why Bloomberg picked this title (3rd different one in a row for the same article), but the topic is relevant.

They Studied Keynes and They’re Doing This. Why Can’t the Fed See It? (Bloomberg)

Federal Reserve policy makers are missing a key element as they assess the health of the labor market: data that includes whether those who are employed are overqualified for their job or would like to work more hours. As a result, the “significant underutilization of labor resources” that Fed officials highlighted last month as they renewed a pledge to keep interest rates low for a “considerable period” is probably even more severe than currently estimated. And the information gap means policy makers may have more difficulty gauging the right moment to raise rates off zero. “We have more slack than the official statistics suggest,” said Michelle Meyer, a senior U.S. economist at Bank of America in New York. “Because it’s difficult to measure underutilization, there’s still a lot of uncertainty as to how much slack remains, which means there’s uncertainty as to the appropriate stance of monetary policy.”

The Labor Department can put its finger on how many people are working part-time because full-time jobs aren’t available, or how many are so discouraged that they’re not even looking for employment. Other forms of underemployment — for example the graduate with an English degree who’s working as a barista –are harder to pinpoint though just as important in trying to measure whether the labor market has improved. The data shortfall sparked a discussion at a Peterson Institute for International Economics conference last month in Washington. Erica Groshen, commissioner of the Bureau of Labor Statistics, asked what additional data would be needed to help quantify labor-market slack. Betsey Stevenson, a member of President Barack Obama’s Council of Economic Advisers, pointed out that while it was possible with current data to determine whether people working less than 35 hours a week are underutilized, those putting in a longer workweek fall off the radar.

The BLS considers anyone working at least 35 hours a week to be full-time. The Census Bureau, which surveys households to get the information needed for the Labor Department to crunch the monthly jobs data, doesn’t ask full-timers whether they’d prefer a different job or additional hours. As far as anyone knows, those workers are fully employed and content.

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China’s numbers come straight out of its political agenda.

China GDP Growth Slowest Since Global Crisis (FT)

China’s economy grew last quarter at its slowest pace since the depths of the global financial crisis, raising concerns over global growth prospects and increasing the likelihood Beijing will introduce broader stimulus measures. Gross domestic product in the world’s second-largest economy expanded 7.3% in the third quarter from the same period a year earlier, its weakest performance since the first quarter of 2009, when growth was just 6.6%. But unlike then, when the economy was in freefall as a result of the global financial crisis originating in the US, China’s growth problems this time are largely homegrown. The latest quarterly reading means China’s economy this year is almost certain to register its slowest annual pace since 1990, when the country faced international sanctions in the wake of the 1989 Tiananmen Square massacre.

A correction in China’s property sector, the most important driver of the economy for much of the past decade, is the biggest drag on growth and most analysts expect things to get worse, given huge oversupply across the country. Investment in real estate in the first nine months continued to expand but at a slower pace, rising 12.5% over the same period last year, compared with an increase of 13.2% in the first eight months. Housing sales fell in the first nine months of this year by 10.8% compared with the same period in 2013, suggesting that the property investment slowdown has further to go. Other monthly data released on Tuesday, including industrial production and consumer retail sales, showed a mild rebound in September compared with the previous two months but most analysts expect the slowdown to continue. By the end of September, Chinese factory gate prices had been in deflationary territory for 32 consecutive months, the longest period of producer price inflation in the country in the modern era.

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This looks a whole lot more realistic than official numbers, although projections 10 years into the future don’t look terribly useful in the current economic climate.

China Growth Seen Slowing Sharply Over Next Decade (WSJ)

China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy, according to a report expected to come out Monday. Such an outcome could batter an already fragile global recovery. But the report by the business-research group the Conference Board also finds that multinational companies in China would benefit. Lean times would give foreign firms more local talent to choose from. Foreign companies and investors could also expect “more hospitable” treatment from Communist Party and government officials and a wider selection of Chinese firms they could acquire, according to the report, which was shared with The Wall Street Journal. Foreign companies should realize that China is in “a long, slow fall in economic growth,” the report said. “The competitive game has changed from one of investment-driven expansion to one of fighting for market share.”

Officials representing China’s State Council, or cabinet, referred questions to its National Bureau of Statistics, which didn’t respond. Senior officials of the Communist Party are gathering in Beijing for a major policy meeting that opens Monday and is expected to discuss the slowdown. The Conference Board forecasts that China’s annual growth will slow to an average of 5.5% between 2015 and 2019, compared with last year’s 7.7%. It will downshift further to an average of 3.9% between 2020 and 2025, according to the report. The outlook for the world’s second-largest economy is one of the most important factors affecting the global economy. For the 30 years through 2011, China grew at an average annual rate of 10.2%, a record unmatched by any major nation since at least World War II. That growth lifted hundreds of millions of Chinese out of poverty and turned the country into a major market for commodity producers in Asia, Latin America and the Middle East, and consumer and capital-goods makers from the U.S., Europe and Japan.

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“Debt gets more expensive over time, because consumer spending power declines. When prices and corporate revenue fall for a sustained period of time, wages inevitably go down, too. That makes fixed-rate debt more expensive, because you have less money instead of more to make the same regular payments.”

Why Deflation Is So Scary (Yahoo)

If the price of a car or an iPhone drops, that’s usually good news for consumers. So it might be puzzling that investors and economists suddenly seem freaked out about the possibility of deflation, or a sustained drop in the level of all prices, on average. Deflation was a concern back in 2010 and it’s a fresh worry now as oil prices plunge, the stock market wavers and consumers put spending plans on hold.  The paradox of deflation is that falling prices on a few items can generally be good for consumers, leaving more money in their pockets for other things. But falling prices on too many things can have ruinous effects on the economy that are hard to reverse. Japan suffered nearly two decades of deflation starting in the early 1990s, and deflation helped prolong the Great Depression in the 1930s. When all prices fall, consumers have a strong incentive to put off purchases – after all, everything will probably be cheaper tomorrow.

Some purchases are hard to delay – food, medical care, gasoline to get to work. But a lot of the things we buy can wait, which is why sales of cars, clothing, and appliances drop sharply when times get tough. In an economy like ours – in which consumer spending accounts for about 70% of total GDP – a powerful incentive to postpone purchases can be disastrous. When spending drops, so does corporate revenue, raising pressure to cut costs, which leads to layoffs and other personnel cutbacks. Companies are likely to freeze salaries or even cut pay for those workers remaining. Dwindling income makes consumers even more leery about spending money, worsening the whole cycle. The other mechanism for deflationary ruin is debt. One big reason lending helps the economy grow is inflation—most loans become easier to pay back over time, because the principal doesn’t grow but income used to pay it down does.

We typically think of inflation as a rise in prices, but it’s usually accompanied by an increase in workers’ wages as well, and as long as wage increases exceed price hikes, ordinary people get ahead. Home buyers, for instance, often “grow into” a mortgage that might seem onerous at first, because their income climbs as they progress through their careers. The mortgage payments on a fixed-rate loan, by contrast, remain constant. So in a typical economic environment, you gradually earn more income to make the same payment every month.

Deflation creates the opposite phenomenon: Debt gets more expensive over time, because consumer spending power declines. When prices and corporate revenue fall for a sustained period of time, wages inevitably go down, too. That makes fixed-rate debt more expensive, because you have less money instead of more to make the same regular payments. The mismatch affects companies and even governments the same way it does consumers, causing cash-flow shortages, liquidity problems and bankruptcy. Each of these ugly outcomes reinforces the others, making a deflationary spiral very hard to pull out of.

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Lower oil prices don’t look very effective vs IS.

Islamic State Earns $800 Million a Year From Oil Sales (Bloomberg)

The Islamic State is earning about $2 million a day, or $800 million a year, selling oil on the black market, IHS Inc. estimated. The terrorist group is producing 50,000 to 60,000 barrels a day, according to an e-mailed release today from the Englewood, Colorado-based information company. It controls as much as 350,000 barrels a day of capacity in Iraq and Syria. Extremist groups typically reply on foreign donations that can be squeezed by sanctions, diplomacy and law enforcement. By tapping the region’s oil wealth, Islamic State, the group that beheaded American journalist James Foley, resembles the Taliban with oil wells. “This is financing and fueling a lot of their activities, military and otherwise,” Bhushan Bahree, a co-author of the report, said today in an interview. “For argument’s sake, let’s say their capacity were cut by half. They’ll still have $400 million coming in. This is many times more than any other source of funding we know of.”

Islamic State consumes about half its production and sells the rest for $25 to $60 a barrel, according to the report. That estimate is in line with those of U.S intelligence officials and anti-terrorism finance experts. Bombing oil-field pump stations may be the best way to cut off the flow of oil since they are stationary and difficult to replace, Bahree said. U.S.-led air strikes haven’t eliminated truck-mounted refineries that Islamic State uses to produce fuel for its war machines and to supply civilians within the territory it controls. Trafficking has encouraged middlemen to buy crude and smuggle it into Turkey, Jordan or Iraq, where it is blended with other oil and sold to unsuspecting buyers, according to the report. “It is very hard to intercept,” Bahree said. “There has probably been smuggling of all sorts of things in this place for thousands of years.” When Iraq’s regional Kurdish government tried to police long-established smuggling routes along a 1,000-kilometer (621-mile) border with what is now Islamic State territory, traffickers found new ones, he said.

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“They blame the shift on new regulations such as higher capital requirements and the Volcker rule”.

A Little Volatility Can Be Good for You (Bloomberg)

Gyrations in financial markets are giving rise to a plaintive cry from investors: Prices are getting more volatile because new regulations are making big banks less willing to buy when others want to sell. Actually, if that’s what’s happening, it would be no bad thing. Following last week’s selloff, investors are complaining about a lack of liquidity, the ability to buy and sell assets (particularly bonds) without moving prices too much. The problem, they say, is that big U.S. banks are pulling back from market making — the buying and selling of assets to meet clients’ needs. They blame the shift on new regulations such as higher capital requirements and the Volcker rule, which aims to limit speculative trading at banks.

Investors are right that something has changed. The big banks are holding much smaller inventories of corporate bonds than they did before the 2008 crisis. In fact, dealers were net sellers of junk bonds in recent weeks, suggesting that they weren’t, in the aggregate, helping clients to unload. From the point of view of an overextended investor needing to sell, this reduction in liquidity can be scary. That said, it’s unclear that regulation is the primary cause. Banks were cutting their inventories long before Congress passed the Dodd-Frank financial reform law in 2010. And liquidity always disappears in bad times, no matter how abundant it seems in good times. Market makers are no more willing to buy than anybody else when prices appear to be in free fall. Last week’s volatility hit some securities, such as U.S. Treasury bonds, to which the Volcker rule doesn’t even apply.

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Not nearly enough.

Forex-Rigging Fines Could Hit $41 Billion Globally (Bloomberg)

The cost for banks to settle probes into allegations traders rigged foreign-exchange benchmarks could hit as much as $41 billion, Citigroup analysts said. Deutsche Bank is seen as probably the “most impacted” with a fine of as much as 5.1 billion euros ($6.5 billion), Citigroup analysts led by Kinner Lakhani said yesterday, estimating the Frankfurt-based bank’s settlements could reach 10% of its tangible book value, or its assets’ worth. Using similar calculations, Barclays could face as much as 3 billion pounds ($4.8 billion) in fines and UBS penalties of 4.3 billion Swiss francs ($4.6 billion), they wrote in a note first sent to clients on Oct. 3. Authorities around the world are scrutinizing allegations that dealers traded ahead of their clients and colluded to rig currency benchmarks. Regulators in the U.K. and U.S. could reach settlements with some banks as soon as next month, and prosecutors at the U.S. Department of Justice plan to charge one by the end of the year, people with knowledge of the matter have said.

The Citigroup analysts made their calculations using a Sept. 26 Reuters report that the U.K. Financial Conduct Authority settlements could include fines totaling about 1.8 billion pounds. They derived their estimates for how high fines could go in other investigations from that baseline, using banks’ settlements in the London interbank offered rate manipulation cases as a guide. “Extrapolating European and, more importantly, U.S. penalties from a previous global settlement suggests to us a total potential global settlement on this key issue,” they said in the note. U.K. authorities will probably account about $6.7 billion of fines across all banks, according to the Citigroup analysts. Other European investigations will account for $6.5 billion. Penalties in the U.S. cases could be about four times greater, hitting $28.2 billion.

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Interesting case. If it forces details out into the open.

How Goldman’s Libya Case Could Disrupt Derivatives (CNBC)

A costly legal battle between Goldman Sachs and the Libyan sovereign wealth fund could have more permanent repercussions for the global banking industry, experts have told CNBC. The Libyan Investment Authority has accused Goldman of misleading it and taking advantage of its lack of financial knowledge to make “substantial” profits on a series of derivative trades back in 2008. The bank denies the allegations and a full hearing has been touted to begin in early 2016 after a preliminary hearing was completed earlier in the month. The LIA claims the disputed derivative trades in early 2008 cost $1 billion, and carried a high degree of risk, but lost a substantial amount of value by the end of the year and expired “worthless” in 2011. Court documents allege that Goldman made profits of $350 million were made and a witness statement from a lawyer working for the LIA claims that the usual disclaimers – called non-reliance agreements – were sent after the trades were made and were never signed.

Satyajit Das, an expert on financial derivatives and risk management, told CNBC via telephone that the case has the potential to get “extremely ugly”. “This could be messy for Goldman Sachs and for a whole range of other banks,” he said, adding that this would bring up the issue of opaqueness with these sorts of trades. “It could lead to an investigation into the selling practices at banks and the types of financial products they offer.” Beyond the prospect of an investigation, industry experts are also forecasting further regulation of the complex derivatives market. Anat Admati, a professor of finance and economics at Stanford Graduate School of Business welcomed any new regulation in this space. Without commenting on this particular case, she said that investments in derivatives can be easily misunderstood by untrained investors.

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Egg meet face.

Bank Of England Payment System Crashes Leaving Homebuyers In Limbo (Guardian)

The Bank of England apologised last night after a crucial payments system collapsed, forcing Mark Carney to launch an urgent investigation following the delay of hundreds of thousands of payments, including for homebuyers waiting for money to be transferred to pay for their new homes. The Bank of England governor promised a “thorough, independent review” after MPs demanded answers into how the system which processes payments worth an average £277bn a day had failed for nearly 10 hours. An 88-year-old woman in Sheffield was among those caught up in the collapse of the behind-the-scenes payment mechanism, which failed to open at 6am and remained shut until 3.30pm – usually the cut-off point for money to be transferred for house sales.

The Bank of England did not admit the shutdown had taken place for more than five hours after the system had been due to open, and was later forced to extend opening hours by four hours to 8pm to clear the backlog of 143,000 payments. More than 10 hours after first admitting to the problem with the clearing house automated payment system (Chaps) the Bank of England eventually apologised “for any problems caused by the delays to the settlement system”. While Chaps was down, there were fears that homebuyers and sellers around the country would be left unable to complete purchases on time and that big businesses, which also use the system, would fail to make payments. Only weeks ago the Bank said it had a new contingency plan for the collapse of the payments system. The Bank of England will subject the system to additional monitoring when it reopens at 6am on Tuesday.

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Emptier words were never heard.

Fed’s Dudley Warns Banks Must Improve Culture or Be Broken Up (Bloomberg)

Banks must change the way employees are compensated and take other steps to fix a corporate culture that encourages misdeeds or face being broken up, said William C. Dudley, president of the Federal Reserve Bank of New York. If bad behavior persists, “the inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” Dudley told industry leaders in a speech yesterday at the New York Fed. “In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.” Dudley’s comments, which follow bank scandals involving Libor and foreign exchange trading, were made at a closed-doors workshop attended by senior bankers at the New York Fed on reforming Wall Street culture and behavior.

Large U.S. banks were widely blamed for taking too much risk leading up to the 2008 financial crisis, which triggered the worst economic downturn since the Great Depression. Lawmakers have since enacted a major overhaul of the rules designed to prevent banks becoming “too big to fail.” Dudley said it was fair to question if the “sheer size, complexity and global scope of large financial firms today have left them ‘too big to manage.’” Barclays Plc Chairman David Walker, who also addressed the gathering, separately said banks should be allowed to overhaul their own culture, rather than have regulators do it for them. Dudley, who has had to defend the New York Fed recently against allegations it was too soft on big Wall Street firms, suggested a number of ways to better align bank employee incentives with the interests of the general public. These include deferred compensation plans that switch emphasis to debt, rather than equity, and a centralized, industry-wide registry for tracking individual offenses.

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Chasing the dodo.

IBM Is in Even Worse Shape Than It Seemed (BW)

Like a driver obeying the commands of a GPS system even as passengers shout that the car is clearly headed toward a ditch, IBM’s chief executive officer, Ginni Rometty, has followed the profit “roadmap” laid out by her predecessor. The company was going to reach $20 in adjusted earnings per share by 2015, damn it, even as nine straight quarters of sinking revenue made that an increasingly untenable feat of financial engineering. IBM laid off workers, fiddled with its tax rate, took on debt, and bought back a staggering number of its own shares to make the math work, even as all that left the company less able to compete with the likes of Amazon.com and Google in cloud computing.

Today Rometty finally abandoned “Roadmap 2015,” announcing that IBM cannot hit the target after all. IBM also said it will pay a chipmaker called GlobalFoundries $1.5 billion to take its chip division off its hands, while also taking a $4.7 billion charge. And IBM reported its third-quarter results—a 10th consecutive period of falling sales, marked by weaker performance in growth markets. “We are disappointed in our performance,” Rometty said in a statement. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry.” In response, shares of IBM were down more than 7% on Monday morning, Oct. 20.

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Does it matter whether there’s forward guidance or not? Isn’t it just plain stupidity anyway? A much bigger problem seems to be the economic and hence political power handed over to central banks.

‘Forward Guidance’ Marches Global Economy Backwards (Satyajit Das)

A paucity of policy options has increased central banks’ reliance on so-called forward guidance, where policy makers telegraph likely future actions. There are two components to forward guidance. First, it communicates clear policies to which the central bank is committed. Second, the commitment is over a medium- to long time horizon. But forward guidance suffers from a number of weaknesses. A fresh batch of eurozone data out next week is likely to confirm that the economy is slowing, with both consumer confidence and flash PMIs forecast to have slumped in October. In the U.K., third-quarter GDP figures and minutes from the Bank of England’s latest policy meeting will give more clues on the health of the country’s economy.

First, a focus on any single or a narrowly based set of indicators is problematic. The Federal Reserve’s commitment to accommodative monetary policy, for example, was based on a target unemployment rate. A single indicator such as unemployment is not meaningful. It can be affected by participation rates or the definition of employment. Levels can be affected by unexpected disruptions including a government shutdown, strikes or natural catastrophes. What is relevant is the nature of employment, such as part- or full-time, and the type of job or income levels. The composition of unemployment, temporary or long-term, age and skill levels of the unemployed, also may be pertinent.

In Japan, meanwhile, the Bank of Japan’s policy targets 2% inflation. It is not entirely clear which inflation indicator is the most relevant. Core inflation ignores the effect of volatile food and energy prices, which are very relevant to Japan. Inflation in domestic goods or imported inflation, such as the result of currency movements, may have different policy implications. Forward guidance relies on the accuracy of forecasts. It implies an automatic rule-based central banking response, which could lead to a sudden and sharp change in interest rate or monetary policy. In reality, guidance is highly conditional. Environmental changes can negate any earlier policy commitment. The Fed, for instance, was forced to clarify that its unemployment target was merely a non-binding indicator. The most damning problem, as Citibank Chief Economist Willem Buiter has argued, is that central bankers have “no skin in the game.” Central banks do not stand to make or lose money from their forward commitments. Central bankers’ tenure or remuneration is also not linked to outcomes.

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Complicated talks.

Ukraine And Russia Agree On $385 Gas Price For Winter (RT)

Moscow and Kiev have confirmed the price of Russian gas to Ukraine until the end of March at $385 per 1,000 cubic meters, according to both Ukrainian President Petro Poroshenko and Russian Foreign Minister Sergey Lavrov. “We have agreed on a price for the next 5 months, and Ukraine will be able to buy as much gas as it needs, and Gazprom is ready to be flexible on the terms,” Lavrov said Monday at a public lecture. Russia’s foreign minister dispelled rumors of two separate prices, one for winter and one for summer. “At the Europe-Asia summit in Milan, there was no talk of summer or winter gas prices, but just about the next 5 months,” the foreign minister said. Included in the $385 price is a $100 discount by Russia. Ukraine is still insisting on a further discount, asking for $325 for ‘summer prices’ after the 5-month winter period.

“We talked about how there should be two prices, like how the European spot market has two prices, a winter price when demand is high, and summer when demand is low. Our joint proposal with the EU was the following: $325 per thousand cubic meters in the summer and $385 per thousand cubic meters in the winter,“ Poroshenko said in an interview on Ukrainian television Saturday. President Poroshenko and Russian President Vladimir Putin reached a preliminary agreement in Milan on Friday for the winter period, but Russia won’t deliver any gas to its neighbor without prepayment.

Gas talks are expected to continue Tuesday in Berlin between the energy ministers of Russia, Ukraine, and the EU. On September 26, the three energy ministers agreed to provide 5 billion cubic meters to Ukraine on a “take-or-pay” contract, to help the country survive the winter months. The so-called winter plan is contingent on Ukraine starting to repay at least $3.1 billion worth of debt to Gazprom. Ukraine is still looking for funding to pay for the gas supplies as well as its $4.5 billion arrears to Russia’s state-owned gas company. Moscow reduced the debt from $5.5 billion to $4.5 billion, calculating in the discount of gas, Putin said on Friday.

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Very bright man, and talking to Russia about grand projects at a time of sanctions. On the other hand, accidents do happen.

“Anti-Petrodollar” CEO Of French Giant Total Dies In Moscow Plane Crash (ZH)

Three months ago, the CEO of Total, Christophe de Margerie, dared utter the phrase heard around the petrodollar world, “There is no reason to pay for oil in dollars”. Today, RT reports the dreadful news that he was killed in a business jet crash at Vnukovo Airport in Moscow after the aircraft hit a snow-plough on take-off. The airport issued a statement confirming “a criminal investigation has been opened into the violation of safety regulations,” adding that along with 3 crewmembers on the plane, the snow-plough driver was also killed.

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I don’t know about the assertion that “NATO has succumbed to the socialist phenomenon”. I think it’s blunt power politics all the way, a protection racket.

The Tragedy Of NATO: “Beware Foreign Entanglements” (Mises Canada)

Mises explained that socialism discourages production while it increases demand. Why produce only to be forced to share with others when one can demand to share in the production of others without regard to having previously produced something of value to those same others? Eventually all altruism vanishes in a sea of cynicism and nothing is produced for anyone to share. The result is a tragedy of the commons fed by moral hazard and socialism. Today we see the above destructive economic forces at work in NATO expansion. When the Soviet Union disintegrated in 1990, the reason for NATO’s existence vanished.

But rather than declare NATO to have been a success in deterring war in Europe, possibly disbanding the alliance and building a new Concert of Europe that would include Russia, NATO bureaucrats set about to expand the alliance to the east. Whereas the Concert of Europe after the Napoleonic Wars had quickly embraced France as an important member, NATO expanded to isolate Russia by absorbing its former satellite nations. The last NATO expansion prior to the disintegration of the Soviet Union had occurred in 1982 when Spain joined the alliance. At that point in time NATO was composed of sixteen nations. Starting in 1999 twelve countries have joined NATO, ten of them former members of the Warsaw Pact.

The other two, Slovenia and Croatia, were previously part of Yugoslavia, officially a non-aligned nation, but a communist dictatorship all the same. With the possible exception of Poland, none of these new members contribute much to the alliance’s military capability, meaning that the older members are shouldering their security burden. Naturally expanding NATO to the east has resulted in isolating and antagonizing Russia, who feels its security threatened. So, NATO has succumbed to the socialist phenomenon by adding new members who demand security without much of an obligation and to the moral hazard phenomenon by adding new members whose territories could be used to house American nuclear weapons, a situation that may yet provoke a major world crisis with Russia, which is precisely what NATO was formed to avoid.

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Interesting angles. 10 years since ‘Hobbit’ was found.

Hobbit Find Rewrites Human History (BBC)

The discovery of a tiny species of human 10 years ago has transformed theories of human evolution. The claim is made by Prof Richard Roberts who was among those to have published details of the “Hobbit”. The early human was thought to have lived as recently as 20,000 years ago and so walked the Earth at the same time as our species. The Hobbit’s discovery confirmed the view that the Earth was once populated by many species of human. It’s a far cry from the old view of a linear progression from knuckle-dragging ape-like creatures to upright modern people. Prof Roberts says the discovery of a completely different species of human on the Indonesian Island of Flores that lived until relatively recently, “put paid to this cosy status quo in one fell swoop”. “It surpassed anything else I’d been involved with because it just kept running. People kept on talking about it and it became part of popular culture and a sign of a new view of anthropology. The days of the old linear models of anthropology were gone.

Dr Henry Gee, the manuscript editor who decided to publish the paper in the journal Nature, said that it gradually dawned on him just how important the discovery was. “It is the biggest paper I have been involved with,” he told BBC News.The publication of the discovery on the Indonesian Island of Flores in October 2004, caused a sensation. The news that another species of human walked among us until relatively recently stunned the world. There were even questions about whether the Hobbit, named Homo floresiensis, still existed somewhere on the island. Perhaps there were other species of humans in other very remote parts of the world yet to be discovered?There are many puzzles that remain about the Hobbit. The female skeleton was 1m (3ft) high and was a very primitive form of human. Her brain was about the size of a chimpanzee, yet there is evidence that she used stone tools.

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Aug 132014
 
 August 13, 2014  Posted by at 7:06 pm Finance Tagged with: , , , ,  


Warner Bros Lauren Bacall publicity still from To Have and Have Not 1944

If you put all the pieces in a jigsaw puzzle in their proper places, a picture emerges. An easy enough principle. But how do you get the pieces, and where do they go? That’s often not so easy at all.

Oil prices are low, and falling, in the face of Iraq and Ukraine. But what does that mean, and how does it fit into the puzzle?

In a report issued on Tuesday, the IEA cut its forecast for worldwide oil consumption growth to 1 million bpd (barrels per day), 180,000 bpd less than previously predicted, while supplies have risen by 300,000 bpd above the forecast output.

Now, the IEA and its US sister, the EIA, are notoriously as unreliable in their numbers as the US government is in jobs and growth numbers, and as China is in all economic numbers. But the trend looks believable.

And to think that only in March the IEA predicted increasing demand and said: “Growth momentum is expected to benefit from a more robust global economic backdrop”.

One thing from the IEA report makes sense; it says the oil market seemed “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world”.

Russia Vulnerable As Oil Prices Hit Nine-Month Low On IEA ‘Glut’ Warnings

Oil prices have fallen to a nine-month low as surging supply from Opec and the US floods the market and fresh demand wilts [..] OECD inventories rose by 88m barrels in the second quarter, the most since 2006. Stocks are still below their five-year average but are no longer as dangerously thin as they were last winter.

[..] Saudi Arabia cranked up its production to more than 10m b/d, the highest since last September. Oil demand fell by 440,000 b/d in Europe and the US over the period [..] The big surprise has been a “sharp contraction” in German demand for oil products, down 3.9pc over the past year. It is much the same picture in Italy and Japan.

I find it curious that Saudi Arabia would raise its production in times when there is an oil ‘glut’. What would they be trying to achieve? Lower prices? For political reasons perhaps? It gets more curious when the EIA says OPEC will reduce production, as per the Wall Street Journal:

EIA Lowers Global Oil Demand Forecast for 2014, 2015

The EIA said it expects the Organization of the Petroleum Exporting Countries to reduce output in 2014 [..] The agency called for 35.84 million bpd of OPEC production in 2014[ ..] OPEC produced 36.12 million bpd last year, according to the EIA. In the U.S., production hit 8.5 million bpd in July, the highest monthly level since April 1987 [..] its forecast total U.S. crude production at 8.46 million bpd in 2015 However, the agency cut its forecast for production in the lower 48 states.

The EIA maintained its forecast for U.S. average daily oil consumption at 18.88 million bpd in 2014 but raised its 2015 forecast to 18.98 million bpd.

The glut can come from either one of two directions: more supply or less demand. Since demand fell by 440,000 b/d in Europe and the US since September, and the IEA says production will rise by 300,000 bpd, there is some wiggle room. But.

US oil consumption never recovered. It’s now at about the same level as in 1997, when there were about 45 million fewer people living in America. That is a huge drop. While there have been advances in efficiency etc., there’s no denying that the economy never recovered either, not by a very long shot. No matter that it supposedly grew at a 4% annualized rate in Q2…

And please don’t forget that this happened at a time when stock markets set records, the Fed balance sheet rose to $4+ trillion and overall debt went to the moon and never looked back. What is that, a quadruple whammy?

Worst Retail Sales Showing in Six Months in Slow Start to Third Quarter

Retail sales were little changed in July, the worst performance in six months, as car demand slowed and tepid wage growth restrained U.S. consumers. The slowdown in purchases followed a 0.2% advance in June [..]

Retailers such as Macy’s are relying on promotions and discounts to entice customers. “There’s no sign of momentum or enthusiasm out of the consumer right now,” said Stephen Stanley, chief economist at Pierpont Securities [..] I don’t think people have the wherewithal, not to mention the inclination, to ramp it up.”

Not even subprime car loans can do the trick anymore. Let alone housing:

Not that that’s a typical American problem:

Chinese Home Sales Fall 10.5%

Home sales in China fell 10.5% in the first seven months of the year to 2.98 trillion yuan ($484 billion) [..] To lure home buyers back to the market, around 30 local governments have loosened property restrictions such as limits on second home purchases. But there has yet to be any meaningful pickup in sales [..] Average home prices in 100 Chinese cities fell for the third straight month in July on a month over month basis, according to data tracker China Real Estate Index System. New construction starts in the January-July period measured by area fell 12.8%

Nor is the US the only country with a retails sales problem:

Japanese GDP Plunges 6.8%, Record Drop in Consumer Spending

Compared to the 3.6% drop in GDP when Japan last hiked its consumption tax in 1997, today’s Q2 GDP collapse of 6.8% annualized is an utter disaster. Consumer Spending collapsed 5.2% QoQ – the most on record.

And Europe fares no better:

Crisis Stalks Europe Again As Deflation Deepens, Germany Stalls

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral. The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012 [..]

Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7% in July, from -0.2% the month before. Spain’s provisional estimate is for a fall of -0.3%. The risk is that this will cause inflation expectations to become unhinged and extremely difficult to reverse.

“The latest inflation figures call for the ultimate bazooka from the ECB. We’re seeing the Japanification of Europe,” said Lena Komileva from G+ Economics. “Deflation pushes up the debt ratios in the southern countries and makes their task even more insurmountable.”

Morgan Stanley warned that Germany’s economy contracted by 0.1% in the second quarter [..] Hans Redeker, the bank’s currency chief said: “It is very difficult to keep recovery going in the eurozone without credit. Companies are just eating up their cash flow.”

Germany’s factory orders from the rest of the eurozone dropped by 10.4% in June [..] The DAX index of stocks in Frankfurt has plummeted 10% over the past month, while yields on 10-year German Bunds have dropped to historic lows of 1.06%.

For Italy, it is already becoming a fresh crisis. The country is caught in a vice, squeezed by a triple-dip recession and zero inflation at the same time. Italy’s €2.1 trillion public debt is rising on a shrinking base of nominal GDP despite austerity policies. The debt ratio has surged five percentage points to 135.6% of GDP over the past year, despite austerity. Portugal is close behind. Its debt has jumped from 127.4% to 132.9% [..] Deflation is pushing both nations into a textbook debt trap.

And then we haven’t even talked about France. Or fresh sanctions that will bite a piece out of GDP both in Russia and in Europe.

Without the markets, or economies, collapsing outright yet, it’s starting to look like while oil cannot save us from economic mayhem, the downfall of our economies is indeed keeping the lack-of-energy monster at bay.

Not that that’s something we should be too happy about, for obvious reasons.

But that’s not the whole story, or the end of the story, and it’s not where the jigsaw pieces fall neatly into place.

What we tend to label geopolitical risks, which will come in very handy to mask economic problems we would have had anyway, are already leading to other events and consequences.

That is to say, the world has started fighting over oil for real. It’s no longer just about dominance, it’s about survival. Of societies, of values, political systems, religions.

Islamist State Funds Caliphate With Mosul Dam, Oil and Gas

Islamic State militants who last week captured the Mosul Dam, Iraq’s largest, had one demand for workers: Keep it going. [..] militants from the al-Qaeda breakaway group told workers hiding in management offices they would get their salaries as long as the dam continued to produce electricity for the region under their control.

[IS] fighters are capturing the strategic assets needed to fund the Islamic caliphate [..] “These extremists are not just mad,” said Salman Shaikh, director of the Brookings Institution’s Doha Center in Qatar. [..] “It’s been a big mistake for some people to think that these guys are some ragtag outfit .. ” [..] “There’s a method to their madness, because they’ve managed to amass cash and natural resources, both oil and water, the two most important things. And of course they are going to use those as a way of continuing to grow and strengthen.”

The dam is the most important asset the group captured since taking Nineveh province in June. The group controls several oil and gas fields in western Iraq and eastern Syria, generating millions of dollars in daily revenue. The group is using the dam as a hideout because it knows it wouldn’t be bombed, he said [..] The dam was completed in 1986 and its generators can produce as much as 1010 megawatts of electricity, according to the website of the Iraqi State Commission for Dams and Reservoirs.

Aziz Alwash, an environmental adviser to the Water Resources Ministry, said the dam needs cement injections as part of its maintenance. “Mosul city would drown within three hours” if the dam broke, he said Aug. 10 in a telephone interview. Other cities down the road to Baghdad would also be inundated while the capital would be under water within four hours.

While you were sleeping, the world changed. Our economies are no longer growing. But some things are. The Islamist State for one. International tension in general. And “We” are actively causing these things to grow as much as anyone else.

It should be crystal clear that oil prices can shoot up at any given moment. One wrong move, one faulty calculation, one missed shot or one stray bullet, that’s all it takes. We like to think of ourselves as being in control, that’s how we grew up. But we no longer are, if we ever were.

Someone at CNBC found a few pieces that fit together:

Are Weaker Oil Prices Signaling Doom For Stocks?

The price of Brent crude slipped to a 13-month low on Wednesday, pushed lower by reports of oversupply in the markets. However, some market watchers believe that this softness could be signaling something more sinister in the global economy, with a risk that the weakness could spread to other assets. [..] Michael Hewson, analyst at CMC Markets, agrees that current global growth forecasts may be too optimistic and depressed demand in Europe and China, along with the anticipated normalization of interest rates in the U.S. and the U.K., could be about to bring investors back down to earth.

[..[ he has felt the market has been too upbeat for most of 2014. “Far be it from me to get in front of a runaway train … but I think that train is a bit crowded.”

“Far be it from me to get in front of a runaway train … but I think that train is a bit crowded,”

Are Weaker Oil Prices Signaling Doom For Stocks? (CNBC)

The price of Brent crude slipped to a 13-month low on Wednesday, pushed lower by reports of oversupply in the markets. However, some market watchers believe that this softness could be signaling something more sinister in the global economy, with a risk that the weakness could spread to other assets. “At the end of the day it’s all about demand,” Michael Hewson, the chief market analyst at brokerage firm CMC Markets told CNBC via telephone. The oil price is simply a leading indicator for demand across the globe, according to Hewson, who predicts the price has more downside risk than upside, barring any unexpected geopolitical event. He agrees that current global growth forecasts may be too optimistic and depressed demand in Europe and China, along with the anticipated normalization of interest rates in the U.S. and the U.K., could be about to bring investors back down to earth.

“I think the (growth forecasts) have been over egging the pudding,” he said, adding that he has felt the market has been too upbeat for most of 2014. “Far be it from me to get in front of a runaway train … but I think that train is a bit crowded,” he said. The price of Brent and WTI has been relatively stable for the last two years as the expansive monetary policy by central banks has coincided with a bull run in the equities market. The commodity saw a brief spike in June with fears over an Islamist militant group taking over large parts of northern Iraq. But markets have slipped since that price move, with Brent crude sliding to $102.45 a barrel on Wednesday to trade near its lowest level since June 2013. U.S. crude fell to $97.16 on Wednesday morning, near levels not seen since February this year.

Oil prices have been in this trend in recent weeks despite tensions in Iraq, Libya and Ukraine, however, it was a new report by the International Energy Agency that weighed on markets Wednesday. On Tuesday, the IEA said that oil has seen weak demand in the last few months and an oil glut has helped to keep a lid on prices. It added that markets were “eerily calm” in the face of the mounting geopolitical risks. Commenting on the report Marshall Gittler, a currency market strategist at IronFX, said that U.S. intervention in Iraq – with targeted airstrikes and militarily advisers entering the country – would only mean a further price fall as the risk premium diminishes.

Read more …

Brent Trades Near 13-Month Low Amid Signs China Is Slowing (Bloomberg)

Brent crude traded near its lowest intraday level in 13 months on speculation that supplies are excessive as Libyan output recovers and economic activity in China slows. West Texas Intermediate was steady. Futures slipped as much as 0.6% in London in a fourth daily decline. Libya exported the first oil cargo from Ras Lanuf port since it was closed by rebels a year ago. China’s broadest measure of new credit plunged to the lowest since the global financial crisis, while the National Bureau of Statistics in Beijing said growth in factory production slowed. The IEA said yesterday a supply glut was shielding the market against threats to output in the Middle East. “On the supply side, there’s been positive news from Libya even as the fighting worsens, giving a better situation in the physical market,” said Frank Klumpp, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany. “The demand side has potential for a bearish surprise as we have growing uncertainty” over China’s economy, he said.

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Japanese GDP Plunges 6.8%, Record Drop in Consumer Spending (Zero Hedge)

Compared to the 3.6% drop in GDP when Japan last hiked its consumption tax in 1997, today’s Q2 GDP collapse of 6.8% annualized is an utter disaster (even if it is slightly better than the expected -7.0% expectations thanks to a surge in the deflator). Inventory additions added 1.0% growth. Consumer Spending collapsed 5.2% QoQ – the most on record. Of course, in the tradition of Keynesian hockey-sticks, this XX% collapse in Q2 is expected to surge back to a 2.5% growth figure in Q3 and lead Japan to the holy grail once more.. only it didn’t quite work out that way last time for Japan. Simply put this is the worst posible outcome for bulls, small beat not enough to rejuice QQE.

Here come the hockeysticks …

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Chinese Home Sales Fall 10.5% (WSJ)

Home sales in China fell 10.5% in the first seven months of the year to 2.98 trillion yuan ($484 billion), data released by the National Bureau of Statistics on Wednesday showed, as potential buyers wait for prices to slide further. Sales were 2.56 trillion yuan in the first half of the year – down 9.2% from the same period of 2013. To lure home buyers back to the market, around 30 local governments have loosened property restrictions such as limits on second home purchases. But there has yet to be any meaningful pickup in sales, as home buyers stay away due to expectations of further price falls and rising inventories. Average home prices in 100 Chinese cities fell for the third straight month in July on a month over month basis, according to data tracker China Real Estate Index System. New construction starts in the January-July period measured by area fell 12.8% to 982.3 million square meters. This compared with a decline of 16.4% to 801.3 million square meters in the first six months.

Property investment in the first seven months of this year rose 13.7% to 5.04 trillion yuan, slowing from 14.1% growth in the first six months of the year. The investment figures are a lagging indicator, and reflect continuing activity in projects that started last year. New construction starts grew 13.5% in 2013. Analysts however, noted that they are awaiting sales data in August and September, rather than July, for cues on whether a turnaround is in the works. More property developers plan new home launches for sale during the two months. The statistics bureau doesn’t give data for individual months. Earlier Wednesday, China’s central bank issued data showing that new lending in July fell sharply from June, dashing hopes of a widespread pickup in mortgage loans and housing sales amid some property policy easing. Many economists have said that the downturn in the property sector poses the biggest risk to China’s economy.

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Crisis Stalks Europe Again As Deflation Deepens, Germany Stalls (AEP)

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral. The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS. Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7% in July, from -0.2% the month before. Spain’s provisional estimate is for a fall of -0.3%. The risk is that this will cause inflation expectations to become unhinged and extremely difficult to reverse.

“The latest inflation figures call for the ultimate bazooka from the ECB. We’re seeing the Japanification of Europe,” said Lena Komileva from G+ Economics. “Deflation pushes up the debt ratios in the southern countries and makes their task even more insurmountable.” The ECB is waiting to see whether its new four-year loans for banks (TLTROs) will stop the relentless contraction of credit and stave off the threat of a Japanese-style deflation trap, but the auctions will not take place until September and December. “Europe could be in deflation before the TLTROs have even begun. They cannot wait until February or March to start thinking about quantitative easing,” said Mr Roberts. Morgan Stanley warned that Germany’s economy contracted by 0.1% in the second quarter, raising the risk of outright recession as the Russia crisis starts to bite. “Momentum really stalled in May and June,” said Hans Redeker, the bank’s currency chief. “It is very difficult to keep recovery going in the eurozone without credit. Companies are just eating up their cash flow.”

Germany’s factory orders from the rest of the eurozone dropped by 10.4% in June, a fall not seen since the white heat of the Lehman crisis in late 2008. The DAX index of stocks in Frankfurt has plummeted 10% over the past month, while yields on 10-year German Bunds have dropped to historic lows of 1.06%. A sudden drop in yields typically signals a recession risk. Ingo Kramer, head of the BDI, the German industry federation, said German companies are struggling but it has not yet reached crisis level. “We are not at risk of recession,” he said. Brussels expects sanctions against Russia to cut eurozone growth by 0.3% this year.

For Italy, it is already becoming a fresh crisis. The country is caught in a vice, squeezed by a triple-dip recession and zero inflation at the same time. Italy’s €2.1 trillion public debt is rising on a shrinking base of nominal GDP despite austerity policies. The debt ratio has surged five percentage points to 135.6% of GDP over the past year, despite austerity. Portugal is close behind. Its debt has jumped from 127.4% to 132.9%, and is certain to move higher after the recovery collapsed earlier this year. There are growing concerns that the Portuguese state will end up footing the bill for the rescue of Banco Espirito Santo after senior bondholders were protected. Deflation is pushing both nations into a textbook debt trap.

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Europe’s Crash-and-Burn Economy (Bloomberg)

As the euro-region economy struggled to emerge from recession in recent years, officials could at least comfort themselves with the performance of the German economy: “We’ll always have Frankfurt,” to miscoin a phrase. That’s no longer true. German investor confidence has worsened for eight consecutive months; today, it collapsed to its lowest level in two years. The euro-region economy is in flames. Here ends the argument that the world of finance and economics is shrugging off Ukraine and Iraq and Ebola and Gaza and all the other geopolitical risks currently assailing the headlines. A sentiment index measuring faith in the six-month economic outlook dropped to 8.6 this month, according to the ZEW Center for European Economic Research in Mannheim. The index has slumped from a seven-year high of 62 reached in December. ZEW explained the situation thus:

The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy. Since the economy in the euro zone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected.

Figures scheduled for release on Aug. 14 are likely to show that the German economy, Europe’s biggest, contracted by 0.1% in the second quarter, according to the median forecast of economists surveyed by Bloomberg News. The euro zone as a whole will be lucky to manage growth of 0.1%, based on data scheduled for release that same day. So just one slip and the region will be flatlining; two slips, as it were, and recession will be just one quarter away: The specter of deflation, meantime, looms ever larger. In Portugal, consumer prices fell at an annual pace of 0.9% last month, their sixth consecutive decline, figures today showed. In Italy, already mired in recession, prices were unchanged as companies presumably decided their prospects are too gloomy for customers to endure increases. The euro-zone economy is heading for a crash; what will it take for European Central Bank President Mario Draghi to see that?

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Sliding German Output Bodes Ill For Eurozone (NY Times)

An important reading on the health of the eurozone economy is expected to show this week that growth stagnated in the most recent quarter as German output faltered, confirming the assessment of many analysts that a lasting recovery remains out of reach for the region. Economists are expecting that in the 18-nation currency bloc, gross domestic product expanded 0.1%in the second quarter compared with the first quarter, equivalent to an annual rate of growth of 0.4%. The eurozone eked out quarterly growth of 0.2%in the first three months of the year. The eurozone GDP report, to be released Thursday by the European Union statistical agency, Eurostat, is based on data from before the latest tensions about Ukraine and before the sanctions against Russia for its involvement in the crisis began to be felt. That means there are plenty of questions hanging over the second half of the year.

Most worrying are the indications that Germany is beginning to struggle, including a steep drop in economic sentiment reported Tuesday. Germany, which accounts for more than one-fourth of the overall eurozone economy, had been propping up the rest of the area for much of the last few years. On Tuesday, a report from the ZEW economic research institute in Mannheim, Germany, showed German economic sentiment fell this month to the lowest level since December 2012. The drop, the report said, “is likely connected to the ongoing geopolitical tensions that have affected the German economy.” The setback followed a warning from the OECD on Monday that its analysis showed “growth losing momentum” in Germany and an official report last week that showed German factories produced far less than expected in June. The gloomy sentiment in Germany is a “signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend,” said Carsten Brzeski, an economist with ING Group in Brussels.

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Eurozone Industrial Production Fell Again in June (WSJ)

Industrial production in the 18 countries that share the euro fell for a second straight month in June, an indication that the currency area’s economic recovery may have faltered again in the second quarter. The European Union’s statistics agency Wednesday said output from factories, mines and utilities fell 0.3% from May, and was unchanged compared with June 2013. That was a surprise, with 21 economists surveyed by The Wall Street Journal last week estimating the production rose by 0.3% during the month. Eurostat will Thursday release its measure of economic growth during the second quarter. Economists expect the agency to record a second straight quarter of slowing growth, with gross domestic product having risen by just 0.1% from the three months to March. The weakness of industrial production will likely cement those expectations. The euro zone’s economy has struggled to grow in the years since the 2008 financial crisis, and in particular has lagged behind other parts of the world economy since its interlinked government debt and banking crises erupted in late 2009.

But with the worst appearing to have passed last year, policy makers had hoped for a gradual acceleration in the rate of growth as 2014 advanced. Instead, the first quarter marked a slowdown from the final three months of 2013, and hopes for a significant rebound in gross domestic product during the second quarter have faded with every data release. Without higher rates of growth, the currency area will struggle to reduce its high levels of debt and unemployment. Weak demand and high joblessness across much of Europe’s economy is reflected in inflation rates far below the European Central Bank’s target of just under 2%. Spain’s statistics agency Wednesday said consumer prices were 0.4% lower in July than a year earlier, having previously estimated prices were down 0.3%. Portugal’s statistics agency Tuesday said consumer prices were down 0.7% on the year in July, a sixth straight month of deflation.

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Eurozone GDP: Brace Yourself (CNBC)

Complacency about the state of the euro zone’s economy could get a serious shaking Thursday, with the latest growth figures not expected to paint a pretty picture. The gross domestic product figures for the second quarter of 2014, following on from a paltry 0.2% increase in the first three months of the year, are unlikely to banish the looming specter of deflation and economic stagnation. Between April and June, the single currency region’s economy is expected to grow by just 0.1% from the previous quarter – or 0.4% from the same time in 2013. By contrast, the U.S. announced last month that its economy grew 4% on an annual basis.

Most importantly, Germany, long the engine room of Europe, and the region’s largest economy, is expected to show faltering or even declining growth. This can partly be accounted for by an unusually strong first quarter, powered by unseasonably high construction figures. Still, German investors are increasingly sceptical about the country’s economic potential, according to the ZEW figures released on Tuesday. Neighboring France is also unlikely to provide much of a fillip to growth, as pressure grows on its government to enact economic reforms more quickly. “Growth in the euro area is perilously low, and vulnerable to even slight setbacks in sentiment,” according to Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics. “At the current rate, growth is far too low and uncertain to make a meaningful difference to a still high unemployment rate and too high debt levels.”

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Oh mon Dieu.

France’s ‘Recovery’ In 1 Hard-To-Believe Chart (Zero Hedge)

With French government bonds trading at record low yields under 1.5%, it is hard to argue that the troubled socialist nation is ‘priced’ for either recovery or credit risk… but then again, thanks to Draghi’s promise and domestic banks’ largesse, none of that matters. With joblessness at record highs, the following chart of France’s “recovery” shows near-record high bankruptcies and record-low profitability. Oh the beauty of socialism…as Europe’s core diverges dramatically. “Recovery”?

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China money supply is waning.

China Credit Gauge Plunges as Expansion in Money Supply Slows (Bloomberg)

China’s broadest measure of new credit unexpectedly plunged to the lowest level since the global financial crisis, adding risks to economic growth already headed for the weakest annual pace in 24 years. Aggregate financing was 273.1 billion yuan ($44.3 billion) in July, the People’s Bank of China said today in Beijing, compared with the 1.5 trillion yuan median estimate of analysts surveyed by Bloomberg News. New local-currency loans of 385.2 billion yuan were half of projections, while M2 money supply grew a less-than-anticipated 13.5% from a year earlier.

Chinese stocks fell after the credit slowdown joined a property slump in testing Premier Li Keqiang’s economic-expansion target of about 7.5%this year, spurring speculation the government will ease policy. The PBOC said the drop in financing resulted from recent regulation and financial institutions’ enhanced control of risks. n“The numbers reflect both tightened regulation over certain financing activities and an underlying weak economy,” said Zhang Bin, an economist in Beijing with the state-run Chinese Academy of Social Sciences. “There’s still no real recovery in growth – at best, we can say that economic performance is stabilizing at a low level.”

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China is teetering.

China Trust Asset Growth Slows in Shadow Banking Campaign (Bloomberg)

China’s trust assets expanded at the slowest pace in two years as the government cracks down on shadow banking and investors reassess the risks of the high-yield investments. Trust companies’ assets under management climbed 6.4% to 12.5 trillion yuan ($2 trillion) as of June 30 from three months earlier, the China Trustee Association said in a statement yesterday. That’s the slowest growth since the first quarter of 2012 and compares with an average annual gain of 50% since 2008. Premier Li Keqiang is grappling with sustaining economic growth while containing financial risks after shadow banking exploded in China from 2010.

A “day of reckoning” is approaching for the trust industry with repayments to peak this quarter and next, and banks are set to bear the bulk of losses as defaults rise, Haitong International Securities Co. economist Hu Yifan wrote in a July 25 report. “Regulators, banks and local governments are all trying to contain the trust risks but things will only really improve if the economy picks up and borrowers get back on their feet,” Zeng Yu, a Beijing-based analyst at China Securities Co., said today by phone. “Chinese investors are becoming more risk averse and increasingly will go for lower-yield but less risky products.” Trust assets under management fell 240 billion yuan in June from May. That was the first monthly decline, the statement said, without specifying a time period.

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We’ll all be rich!

JPMorgan Joins Goldman in Designing New Generation Derivatives (Bloomberg)

Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation. JPMorgan Chase is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as €10 billion ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt. Wall Street is starting to return to the financial innovation that helped extend the debt rally seven years ago before exacerbating the worst financial crisis since the Great Depression.

The instruments are springing back to life as investors seek new ways to boost returns that are being suppressed by central bank stimulus. At the same time, they’re allowing hedge funds and other investors to bet more cheaply on a plunge after a 145%rally in junk bonds since 2008. “The true sign of a top is when you have these new structures piling up,” said Lawrence McDonald, a chief strategist at Newedge USA LLC, and author of the book “A Colossal Failure of Common Sense” about the 2008 demise of Lehman Brothers Holdings Inc. “At the top of the market in 2007, there were these types of innovation and many investors didn’t realize about it at that time. These products are a clear risk indicator.”

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New York Prosecutors Charge Payday Loan Firms With Usury (NY Times)

A trail of money that began with triple-digit loans to troubled New Yorkers and wound through companies owned by a former used-car salesman in Tennessee led New York prosecutors on a yearlong hunt through the shadowy world of payday lending. On Monday, that investigation culminated with state prosecutors in Manhattan bringing criminal charges against a dozen companies and their owner, Carey Vaughn Brown, accusing them of enabling payday loans that flouted the state’s limits on interest rates in loans to New Yorkers. Such charges are rare. The case is a harbinger of others that may be brought to rein in payday lenders that offer quick cash, backed by borrowers’ paychecks, to people desperate for money, according to several people with knowledge of the investigations. “The exploitative practices — including exorbitant interest rates and automatic payments from borrowers’ bank accounts, as charged in the indictment — are sadly typical of this industry as a whole,” Cyrus R. Vance Jr., the Manhattan district attorney, said on Monday.

In the indictment, prosecutors outline how Mr. Brown assembled “a payday syndicate” that controlled every facet of the loan process — from extending the loans to processing payments to collecting from borrowers behind on their bills. The authorities argue that Mr. Brown, along with Ronald Beaver, who was the chief operating officer for several companies within the syndicate, and Joanna Temple, who provided legal advice, “carefully crafted their corporate entities to obscure ownership and secure increasing profits.” Beneath the dizzying corporate structure, prosecutors said, was a simple goal: make expensive loans even in states that outlawed them. To do that, Mr. Brown incorporated the online payday lending arm, MyCashNow.com, in the West Indies, a tactic that prosecutors say was intended to try to put the company beyond the reach of American authorities. Other subsidiaries, owned by Mr. Brown, were incorporated in states like Nevada, which were chosen for their light regulatory touch and modest corporate record-keeping requirements, prosecutors said.

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Islamist State Funds Caliphate With Mosul Dam, Oil and Gas (Bloomberg)

Islamic State militants who last week captured the Mosul Dam, Iraq’s largest, had one demand for workers: Keep it going. Arriving in their Toyota pickup trucks, armed with Kalashnikov assault rifles and wearing a patchwork of military uniforms, robes and turbans, jubilant militants from the al-Qaeda breakaway group told workers hiding in management offices they would get their salaries as long as the dam continued to produce electricity for the region under their control, according to a technician who was at the dam when nearly 500 militants drove off Kurdish troops. Islamic State’s rampage through northern Iraq has inspired terror as stories spread of beheadings and crucifixions. At the same time, its fighters are capturing the strategic assets needed to fund the Islamic caliphate it announced in June and strengthen its grip on the territory already captured. “These extremists are not just mad,” said Salman Shaikh, director of the Brookings Institution’s Doha Center in Qatar.

“There’s a method to their madness, because they’ve managed to amass cash and natural resources, both oil and water, the two most important things. And of course they are going to use those as a way of continuing to grow and strengthen.” The dam is the most important asset the group captured since taking Nineveh province in June. The group controls several oil and gas fields in western Iraq and eastern Syria, generating millions of dollars in daily revenue. U.S. President Barack Obama said the fight against militants in Iraq will be a “long-term project,” tying the prospects for success to whether the nation’s leaders quickly form an inclusive government. The U.S. conducted several strikes last week against Islamic State fighters attacking Yezidi civilians near Sinjar. The group still controls the dam. Fighter jets and drones were flying over it on Aug. 9 without hitting it, said the technician.

The group, which used to call itself Islamic State in Iraq and the Levant, is using the dam as a hideout because it knows it wouldn’t be bombed, he said [..] The dam was completed in 1986 and its generators can produce as much as 1010 megawatts of electricity, according to the website of the Iraqi State Commission for Dams and Reservoirs. Aziz Alwash, an environmental adviser to the Water Resources Ministry, said he’s concerned the militants will use the dam to blackmail the government. The dam needs cement injections as part of its maintenance, he said. “Mosul city would drown within three hours” if the dam broke, he said Aug. 10 in a telephone interview. Other cities down the road to Baghdad would also be inundated while the capital would be under water within four hours. [..] “It’s been a big mistake for some people to think that these guys are some ragtag outfit,” said Shaikh of the Brookings Institution.

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Just what we needed.

Obama Administration Loosens Ban on Lobbyists in Government (Reuters)

President Barack Obama is loosening restrictions on lobbyists who want to serve on federal advisory boards, a White House official said on Tuesday, a setback to the president’s efforts to tamp down special interest influence in Washington. Obama came to office pledging to curtail the sway of lobbyists and banned lobbyists from serving on such panels, which guide government policy on a range of topics ranging from cancer to towing safety. The president said he was doing so because the voices of paid representatives of interest groups were drowning out the views of ordinary citizens.

But many lobbyists felt they were being unfairly tarred by Obama’s campaign to keep them out of public service. A lawsuit challenging the ban was initially dismissed, but a District of Columbia Circuit Court in January reinstated it. A spokesperson for the White House Office of Management and Budget said the administration was revising its earlier guidance on lobbyists serving on federal advisory panels to clarify that lobbyists may now serve on such panels when they are representing the views of a particular group. There are more than 1,000 federal advisory committees. The head of a lobbying industry trade group called the change a positive step that will allow the government to draw on the expertise of people whose experience can be beneficial in making policy.

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Get out! There’s no future for your children there.

Southwest Braces As Lake Mead Water Levels Drop Further (AP)

Once-teeming Lake Mead marinas are idle as a 14-year drought steadily drops water levels to historic lows. Officials from nearby Las Vegas are pushing conservation but also are drilling a new pipeline to keep drawing water from the lake. Hundreds of miles away, farmers who receive water from the lake behind Hoover Dam are preparing for the worst. The receding shoreline at one of the main reservoirs in the vast Colorado River water system is raising concerns about the future of a network serving a perennially parched region home to 40 million people and 4 million acres of farmland. Marina operators, water managers and farmers who for decades have chased every drop of water across the booming Southwest and part of Mexico are closely tracking the reservoir water level already at its lowest point since it was first filled in the 1930s.

“We just hope for snow and rain up in Colorado, so it’ll come our way,” said marina operator Steve Biggs, referring to precipitation in the Rockies that flows down the Colorado River to help fill the reservoir separating Nevada and Arizona. By 2016, continued drought could trigger cuts in water deliveries to both states. [..] The effect of increased demand and diminished supply is visible on Lake Mead’s canyon walls. A white mineral band often compared with a bathtub ring marks the depleted water level. The lake has dropped to 1,080 feet above sea level this year – down almost the width of a football field from a high of 1,225 feet in 1983. A projected level of 1,075 feet in January 2016 would trigger cuts in water deliveries to Arizona and Nevada. At 1,000 feet, drinking water intakes would go dry to Las Vegas, a city of 2 million residents and a destination for 40 million tourists per year that is almost completely dependent on the reservoir. That has the Southern Nevada Water Authority spending more than $800 million to build a 20-foot-diameter pipe so it can keep getting water.

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Ouch.

Worst Drought In Half A Century Hits China’s Bread-Basket (MarketWatch)

China’s worst drought in half a century is sweeping across crucial agricultural regions, devastating harvests in its wake and threatening food security. Part of the area hit by unusually dry weather — the northeastern Manchurian Plain — is known as China’s bread-basket, supplying much of the country’s corn, wheat and soybean production. In a portion of the plain, in Jilin province, 10 major grain producing counties are facing the lowest rainfall since 1951, and many corn fields are facing “zero harvest,” according to report by the state-run Xinhua New Agency, citing Jilin’s provincial weather bureau. Next door in Liaoning province, there has been no rain at all since late July.

And with Jilin government meteorologist Yang Xueyan warning that the situation will likely get worse in the near future, concern over the drought has sent local corn futures rising more than 4% in less than two week, First Financial Daily reported Friday. But the crisis isn’t confined to the Manchurian Plain alone — according to state broadcaster CCTV, the drought is impacting more than one-third of China. This includes the central Chinese province of Henan, another agriculturally important area, which has seen the weakest flood season in 53 years, leaving some rural communities with no viable drinking water, let alone water needed for irrigation, for as long as three months, CCTV said. In what may be a sign of things to come, the state-owned SDIC Zhonggu Futures brokerage is predicting a 40-million-ton corn deficit this summer.

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Brilliant.

The Privilege Of Watching War (Mises Canada)

The prospect of renewed war has little effect on the public anymore. We have been desensitized to the violence because it seemingly never stops. Material capitalism has created a state of luxury never known to mankind before our current day; yet it renders our sympathy for the plight of others flaccid. We watch movies and play video games and pretend to know what war is like. But in reality, we can’t begin to understand how it feels to live under the threat of bombs and shrapnel every day. As Americans, and Westerners, we are gifted with the option to not partake directly in war, but play the casual observer. It’s a privilege; and not at all like the class privilege egalitarians are constantly harping about. To see explosions go off in foreign lands, destroying homes, mutilating children, killing family members, is a jarring sight. But as long as it’s a pixelated image on a computer screen, it fails to have the same heart-wrenching effect as if it were occurring just a few feet away. It fails to invoke the emotional intensity that is the most potent weapon in battle.

It fails to show the emotional impetus that is behind vindictive combat. How lucky we are to be far removed from the cries of a mother whose child was collateral damage in an air strike. How lucky we are to not have our brothers and sisters disintegrated before our eyes. How lucky we are to not have our parents taken from us by stray bullets. How lucky are we not to have a generation of orphans, angry over the death of their mothers and fathers and wishing to exact revenge. The new Vice News documentary on the growing Islamic State in Syria provides a candid but eerie look into the internal deliberations of West-hating Muslim fanatics. These aren’t ordinary folks happy with careers and raising families. They live for jihad. They feed children propaganda on why American and European infidels must die. What’s discomforting about this mindset is that it’s not completely unjustifiable.

At one point during the mini-series, a pious man dedicated to the cause of the Islamic State declares, “we are going to invade you as you invaded us. We will capture your women as you captured our women. We will orphan your children as you orphaned our children.” Can it really be denied that a century of meddling in the Middle East hasn’t created this sentiment of seething vengefulness? Who are we, as Americans and citizens of militarily-dominant countries, to sit back and ignore this type of anger, when under the same circumstances, we would feel the same way? Such unfettered rage demands reflection: how blessed we are to not live in such a maddening state. And how fortunate we are to have an ocean of distance between us and pit of despair known as the Middle East. It’s truly unfortunate how the suffering of others helps us to understand the blessings wrought by domestic tranquility.

The other day, I shared an elevator with Eli Lake of The Daily Beast. Well-respected as a foreign policy analyst with high-ranking connections, Lake is one of the biggest agitators for war in the media. Seeing him up close was quite a revelation. Clad in nicely-fitted dress clothes, I was struck by Lake’s protruding belly. It was reminiscent of when I ran into Bill Kristol months before in the same elevator. Same clothes, same overweight figure. These men have the benefit of filling their gullets at rubber chicken dinners while begging for death and destruction across the globe. They don’t don military garb, pick up AR-15s and take care of business themselves. They would rather stare into a television camera and make the case for other people’s children to go off and die in war.

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Highly recommended read.

Sovereign Debt For Territory: A New Global Elite Swap Strategy (Salbuchi)

In recent decades, dozens of sovereign nations have fallen into ever-deepening trouble by becoming indebted with the “private megabank over-world” for amounts far, far in excess of what they can ever pay back. Is this due to bankers’ professional malpractice coupled with government mismanagement on a truly grand scale? Or are we seeing global power elite long-term planners slowly achieving their goals? Recurrent sovereign debt crises reflect neither “over-lending mistakes” by bankers and investors, nor “innocence” on the part of successive governments in deeply indebted nations. Rather, it all ties in with a global model for domination driven by a system of perpetual national debt which I have called “The Shylock Model”. [..] Sovereign debts are a major problem in just about every country in the world, including the US, UK and EU nations. So much so, those debts have become a Damocles’ Sword threatening the livelihood of untold billions of workers around the world.

One often wonders why governments indebt themselves for so much more than they can ever hope to pay… Here, Western economists, bankers, traders, Ivy League academics and professors, Nobel laureates and the mainstream media have a quick and monolithic reply: because all nations need “investment and investors” if they wish to build highways, power plants, schools, airports, hospitals, raise armies, service infrastructures and a long list of et ceteras, economic and national activities are all about. But more and more people are starting to ask a fundamental common-sense question: why should governments indebt themselves in hard currencies, decades into the future with global mega-bankers, when they could just as well finance these projects and needs far more safely by issuing the proper amounts of their own local sovereign currency instead?

Here is where all the above “experts” go berserk & ballistic, shouting back: “Issue currency? Are you crazy?? That’s against the “rules & laws” of economics!!! Issuing national sovereign currency to finance the real economy’s monetary needs leads to inflation and lost jobs and chaos and… (puts us nice mega-bankers out of a job…)!!.” That’s when they all gang-up into noisy “The sky is falling! The sky is falling!!” mode. Then you ask them: What happens when countries default on their unpayable sovereign debts – as they invariably and repeatedly do – not just in Argentina, but in Brazil, Spain, Venezuela, France, Costa Rica, Peru, El Salvador, Portugal, Russia, Bolivia, Iceland, Turkey, Greece, Cyprus, Thailand, Nigeria, Mexico, and Indonesia? Again the voice of the “experts”: “Then countries must “restructure” their debts kicking them forwards 20, 40 or more years into the future, so that your great, great, great grandchildren can continue paying them”. Oh, I see!

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Russia Vulnerable As Oil Prices Hit Nine-Month Low On IEA ‘Glut’ Warnings

Oil prices have fallen to a nine-month low as surging supply from Opec and the US floods the market and fresh demand wilts, leading to an “oil glut” in the Atlantic region despite the twin crises in Iraq and Russia. The International Energy Agency (IEA) cut its forecast for the rise in global consumption to just 1m bpd (b/d) this year due to near recession conditions in Europe and as pervasive weakness in the world economy disappoints. This comes as supply rises by a further 300,000 b/d beyond what was already planned. The warning sent Brent crude prices tumbling to $104 a barrel, the lowest this year. The sudden shift in the balance of the market has allowed the OECD club of rich states to build up their oil stocks at the fastest rate in eight years, creating an extra layer of protection against any possible supply shock from Russia and Iraq. The agency said OECD inventories rose by 88m barrels in the second quarter, the most since 2006. Stocks are still below their five-year average but are no longer as dangerously thin as they were last winter.

The IEA said in its monthly report that the oil market seemed “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world”. Yet so far the rise in supply has overwhelmed any actual disruptions from crisis zones. Libya’s output doubled to 430,000 b/d in July from a month earlier despite the continuing war between rival militias for control of the country’s oil wealth. Saudi Arabia cranked up its production to more than 10m b/d, the highest since last September. Oil demand fell by 440,000 b/d in Europe and the US over the period, a sign of how weak global recovery still is, consistent with a rare fall in the CPB’s index of world trade in May. The big surprise has been a “sharp contraction” in German demand for oil products, down 3.9pc over the past year. It is much the same picture in Italy and Japan.

The supply glut leaves the world economy slightly less vulnerable to a shock if the crisis escalates in Russia. The West has already imposed a funding freeze on Russia’s top oil company, Rosneft. This could ratchet up to Iran-style sanctions on Rosneft deliveries as well if the Kremlin launches a full-blown invasion of eastern Ukraine. Falling prices will ratchet up the pressure on Russia, which needs a price near $110 to balance its budget. While it has a reserve fund to cover any shortfall, this would be depleted fast if oil falls anywhere near $80 and Russia goes into a deep recession. Most of Russia’s energy revenues come from oil, not gas. The crisis in Iraq has yet to pose a serious threat to oil exports, though this could change at any time. The vast majority of Iraqi supply comes from Shia-controlled fields in the south. The most powerful force now holding down global prices is the US fracking industry. Shale will boost US output by a further 1.2m b/d this year to a total of 11.5m, increasing America’s lead as the world’s biggest producer.

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Petrol prices expected to fall after Saudis open the oil taps

Petrol prices are poised to fall further after the cost of a barrel of crude oil reached its lowest level this year. The fall followed the publication of an influential report that showed a glut of crude from Saudi Arabia flowing on to the market and rising stockpiles. The Paris-based International Energy Agency, the leading oil think tank, said yesterday that the world will consume less crude than experts had thought this year. Saudi Arabia’s supplies are running at the highest level since last September and crude from Libya is back on the market. Recent figures from Experian Catalist, a petrol analyst, show the typical price of unleaded petrol is almost unchanged this year at 131.3p a litre and the cost of diesel is down from 138.3p to 135.6p. However, supermarkets are already cutting prices at the pumps in a battle for customers that could be intensified by the slump in crude. The supply glut leaves the world economy slightly less vulnerable to a shock if the crisis over Ukraine escalates.

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EIA Lowers Global Oil Demand Forecast for 2014, 2015 (WSJ)

Government forecasters lowered their forecast for global oil consumption this year and next, the latest sign of weak demand that is pressuring prices. The U.S. Energy Information Administration, in its monthly short-term energy outlook released Tuesday, cut its international consumption forecast to 91.56 million bpd this year and 92.96 million bpd next year. Last month, the EIA called for 91.62 million bpd in 2014 and 93.08 million in 2015. Earlier Tuesday, the International Energy Agency also lowered its global demand forecast for 2014 to 92.7 million bpd. Prices have fallen in recent weeks on concerns about weak demand. Ongoing violence in Iraq, Ukraine and other parts of the world hasn’t disrupted oil production, as investors worried earlier this summer. Brent, the global oil benchmark, traded at nine-month intraday lows Tuesday and appeared on track to close at a 13- month low.

The EIA said it expects the Organization of the Petroleum Exporting Countries to reduce output in 2014, offsetting the production growth from such non-OPEC countries as the U.S. The agency called for 35.84 million bpd of OPEC production in 2014, down from its earlier forecast of 35.93 million bpd. OPEC produced 36.12 million bpd last year, according to the EIA. In the U.S., production hit 8.5 million bpd in July, the highest monthly level since April 1987, the EIA said. The agency maintained its forecasts for total U.S. crude production at 8.46 million bpd in 2015 and 9.28 million bpd, noting it would represent the highest level of annual average oil production since 1972. However, the agency cut its forecast for production in the lower 48 states and raised its expectation for production in the offshore Gulf of Mexico.

The EIA maintained its forecast for U.S. average daily oil consumption at 18.88 million bpd in 2014 but raised its 2015 forecast from 18.95 million bpd to 18.98 million bpd. The EIA cut its forecast of average prices for the global Brent benchmark oil contract this year and raised its estimate for next year. The agency said it expects prices of $108.11 a barrel in 2014 and $105.00 a barrel in 2015, compared to its prior assessment of $109.55 a barrel this year and $104.92 a barrel next year. For the U.S. benchmark, the EIA lowered its estimate to an average price of $100.45 a barrel in 2014, from $100.98 a barrel last month. The gap between the Brent and the U.S. benchmark contracts is likely to average $8 in 2014 and $9 in 2015, the EIA said. As a result of soaring domestic energy production, petroleum imports have declined significantly, the EIA said, with the share of consumption met by net imports expected to fall from 33% in 2013 to 22% in 2015, the lowest level since 1970. The EIA lowered its forecast for average retail gasoline prices this year from $3.54 a gallon to $3.50 a gallon.

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The US economy supposedly grew at a 4% annualized rate in Q2.

Worst Retail Sales Showing in Six Months in Slow Start to Third Quarter (Bloomberg)

Retail sales were little changed in July, the worst performance in six months, as car demand slowed and tepid wage growth restrained U.S. consumers. The slowdown in purchases followed a 0.2% advance in June, the Commerce Department reported today in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 0.2% gain. Excluding cars, sales rose 0.1%. Job growth has yet to stoke the type of wage gains needed to boost household purchases, a sign the economic expansion will probably not sustain the second-quarter pickup into the end of the year.

Retailers such as Macy’s are relying on promotions and discounts to entice customers, whose spending accounts for about 70 percent of the economy. “There’s no sign of momentum or enthusiasm out of the consumer right now,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, who accurately forecast today’s sales figure. “Income growth continues to be so-so. Employment has picked up in recent months but you’re not seeing the growth in hours worked that would generate big increases in paychecks. I don’t think people have the wherewithal, not to mention the inclination, to ramp it up.”

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 August 11, 2014  Posted by at 4:51 pm Finance Tagged with: , , , , ,  


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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