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Debt Rattle September 8 2017

Sep 082017

September 8, 2017 Posted by Raúl Ilargi Meijer at 9:29 am Finance Tagged with: cronies, debt, earthquake, endgame, hack, Irma, Japan, José, Macron, Mexico 6 Responses »

Irma heads for Florida

• Irma Heads For Florida (R.)

• Magnitude 8.4 Earthquake Strikes Off Mexico’s Southern Coast (DW)

• Worst US Consumer Data Hack Ever? Equifax Confesses (WS)

• Consumer Credit & The American Conundrum (Roberts)

• Low Interest Rates Major Source Of Concern – German Financial Watchdog (CNBC)

• Japan’s April-June Economic Growth Much Slower Than Preliminary Reading (R.)

• The North Korean Endgame is Playing Out Now – Rickards (DR)

• Theresa May Apponts Cronies In ‘Sweeping Power Grab’ (Ind.)

• At Democracy’s Birthplace, Macron Dreams Of Europe 2.0 (AP)

650,000 mandatory evacuations. But gas shortages make it hard to get away. Irma is twice the size of hurricane Andrew.

• Irma Heads For Florida (R.)

The eye of Hurricane Irma grazed the Turks and Caicos Islands on Thursday, rattling buildings after it smashed a string of Caribbean islands as one of the most powerful Atlantic storms in a century, killing 14 people on its way to Florida. With winds of around 185 miles per hour (290 km per hour), the storm the size of France has ravaged small islands in the northeast Caribbean in recent days, including Barbuda, Saint Martin and the British and U.S. Virgin Islands, ripping down trees and flattening homes and hospitals. Winds dipped on Thursday to 165 mph as Irma soaked the northern coasts of the Dominican Republic and Haiti and brought hurricane-force winds to the Turks and Caicos Islands. It remained an extremely dangerous Category 5 storm, the highest designation by the National Hurricane Center (NHC).

Irma was about 55 miles (85 km) south of Great Inagua Island and is expected to bring 20-foot (6-m) storm surges to the Bahamas, before moving to Cuba and ploughing into southern Florida as a very powerful Category 4 on Sunday, with storm surges and flooding due to begin within the next 48 hours. Across the Caribbean authorities rushed to evacuate tens of thousands of residents and tourists. On islands in its wake, shocked locals tried to comprehend the extent of the devastation while simultaneously preparing for another major hurricane, Jose, now a Category 3 and due to hit the northeastern Caribbean on Saturday.

“Mexico earthquake is most powerful to hit the country in a century, president says”

• Magnitude 8.4 Earthquake Strikes Off Mexico’s Southern Coast (DW)

The quake struck late on Thursday, and was recorded as a magnitude 8.4 on the Richter scale according to Mexico’s National Seismological Service. Government officials said that at least five people died in the country’s south. The US Tsunami Warning Center has cautioned that widespread, devastating tidal waves were possible on Mexico’s coast, as well as in Guatemala, El Salvador, Costa Rica, Nicaragua, Panama, Honduras and Ecuador. Shortly thereafter, authorities reported a tsunami was indeed headed towards the coast, fortunately only 0.7 meters (2.3 feet) tall. While there were no immediate reports of major damage, Mexico’s civil protection agency reported that it was the strongest tremor to hit the country since a 1985 earthquake that killed thousands and destroyed entire buildings.

Its epicenter was about 123 km (76 miles) south of the town of Pijijiapan in Chiapas state, but the shock was felt as far away as Mexico City, sending residents fleeing swaying buildings and knocking out electricity in parts of the city. The quake was also felt in much of Guatemala, which borders Chiapas. Civil Defense officials wrote on Twitter that their personnel were patrolling the streets in Chiapas aiding residents and looking for damage. They also issued a warning for aftershocks, several of which themselves registered a 5.0 magnitude according to the US Geological Survey (USGS). Chiapas Governor Manuel Velasco told broadcaster Televisa some homes had been damaged and a shopping center had collapsed in the town of San Cristobal. “Homes, schools and hospitals have been affected,” Velasco said.

The execs delayed reporting the hack so they could offload their shares. Why are these guys walking around free?

• Worst US Consumer Data Hack Ever? Equifax Confesses (WS)

Equifax, as a consumer credit bureau, collects financial, credit, and other data on every US consumer. It has names, birth dates, social security numbers, driver’s license numbers, bank account numbers, credit card numbers, mortgage data, and payment history data, including to utilities, wireless service providers, and the like. It collects data on bank balances, loan balances, credit card balances, credit card purchases, and myriad personal details. It has massive digital dossiers on every consumer in the US and in some other countries. And it sells this data to other companies, such as banks, credit card companies, car dealerships, retailers, and others, as a routine part of its business model. That’s how it makes money. But when someone breaks in and steals this data without paying Equifax for it, well, that’s a huge deal. And it is.

Turns out, Equifax got hacked – um, no, not today. Today it disclosed that it had discovered on July 29 – six weeks ago – that it had been hacked sometime between “mid-May through July,” and that key data on 143 million US consumers was stolen. There was no need to notify consumers right away. They’re screwed anyway. But it gave executives enough time to sell 2 million shares between the discovery of the hack and today, when they crashed 13% in late trading. Given the quantity and sensitivity of the stolen data, it may well be the biggest and worst breach in US history. That stolen data “primarily includes”:• Names • Social Security numbers • Birth dates • Addresses • “In some instances,” driver’s license numbers.

In addition, the stolen data includes: • Credit card numbers of around 209,000 US consumers • “Certain dispute documents with personal identifying information” of around 182,000 US consumers. • “Limited personal information for certain UK and Canadian residents.” This is the kind of information with which identities can be stolen and money can be borrowed in your name. Those data points are the crown jewels for hackers.

It has all been built on debt for decades.

• Consumer Credit & The American Conundrum (Roberts)

Under more normal circumstances rising consumer credit would mean more consumption. The rise in consumption should, in theory, led to stronger rates of economic growth. I say, in theory, only because the data doesn’t support the claim. Prior to 1980, when the amount of debt used to support consumption was fairly stagnant, the economy, wages, and personal consumption expanded. However, as I noted previously, that all changed with financial deregulation in the early 80’s which fostered three generations of debt driven excesses. In the past, if they wanted to expand their consumption beyond the constraint of incomes they turned to credit in order to leverage their consumptive purchasing power. Steadily declining interest rates and lax lending standards put excess credit in the hands of every American. (Seriously, my dog Jake got a Visa in 1999 with a $5000 credit limit) .

This is why during the 80’s and 90’s, as the ease of credit permeated its way through the system, the standard of living seemingly rose in America even while economic growth rate slowed in America along with incomes. Therefore, as the gap between the “desired” living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.

Draghi has a fight on his hands. And he’s going to lose it.

• Low Interest Rates Major Source Of Concern – German Financial Watchdog (CNBC)

The continued low interest environment in key markets such as Europe, the U.S. and the U.K. is a “major source of concern”, according to Felix Hufeld, the president of the German financial regulatory authority. Alluding to the results of a recent survey, the authority over which he presides carried out alongside staff at Germany’s central bank, the Bundesbank, Hufeld described the effect on domestic banks. “The impact is massive and is creeping into the balance sheets more and more. The longer it continues, the higher the risk for a change of interest rates is increasing as well,” he warned, speaking from the Handelsblatt annual banking summit in Frankfurt on Thursday. His wariness comes despite his acknowledgment that the banking system has become much more solid than it was 10 years ago when the financial crisis broke out.

“Both the amount as well as the quality of capital has been massively increased. Risk management procedures have been improved, governance procedures have been improved. Remuneration has been curbed – so all sorts of things – a very wide range of things have been done,” he explained before sounding a note of caution. “But one thing should be clear – no regulatory system and no financial market in the world is invulnerable. There can be and there will be new crises coming up somewhere in the future,” Hufeld declared, pointing to real estate as the most notable cause for concern. The BaFin president’s comments echoed those of fellow Handelsblatt summit participants such as Deutsche Bank CEO John Cryan and Goldman Sachs’s CEO Lloyd Blankfein. Cryan joined Hufeld in warning of the possibility of bubbles forming in certain asset classes, adding, “If you look at the higher risk end of the market, I don’t think you get the right reward for the risk you’re taking right now.”

What a surprise.

• Japan’s April-June Economic Growth Much Slower Than Preliminary Reading (R.)

Japan’s economic growth in the second quarter was much slower than seen in a stellar preliminary reading, government data showed on Friday, confounding hopes for a long awaited pick-up in domestic demand. The downgrade was widely expected after data used to revise gross domestic product figures showed capital spending in April-June rose at a slower annual pace than the previous quarter. While the disappointing data may weaken confidence in the government’s economic policies and the business outlook, analysts still expect the economy to sustain a steady recovery as robust global demand underpins exports and a tightening job market improves the prospects for higher wages.

Japan’s economy, the world’s third largest, expanded at an annualized rate of 2.5% in the April-June quarter, less than the initial estimate of annualized 4.0% growth, Cabinet Office data showed. That was also lower than a median market forecast for a revision to a 2.9%. On the quarter, the economy grew a revised 0.6% in real, price-adjusted terms, against a preliminary reading of a 1.0% increase and the median estimate of a 0.7% expansion. Capital expenditure, a key component of GDP, rose 0.5% for the quarter, marked down from the preliminary estimate of a 2.4% increase.

“The United States is facing a six month window to act and I believe they will.”

• The North Korean Endgame is Playing Out Now – Rickards (DR)

“North Korea has already beaten the world to the punch. They’ve been building up their strategic oil reserves. What that means is they have an estimated year’s worth of held in reserve and China has played a role in these things in the past.” “The area that would be effective for a reactionary measure would be for the United States to exclude the People’s Bank of China, the Industrial and Commercial Bank of China and some of the other major Chinese banks from within the U.S dollar payment systems. The U.S could completely shut down the U.S operations.” “Ultimately, the Chinese are facilitating the North Korean finance. The move would be a kind of sanction with bite behind it. My expectation would be that China wouldn’t necessarily put pressure on North Korea. In reaction we could see escalation of further sanctions from the Chinese against the United States leaving for a trade and financial war without solving the North Korean situation.”

“Currently, North Korea is in what is classified as a ‘break out.’ Under typical nuclear development phases, we’ve normally seen countries that are cheating on nuclear development programs complete their operations in baby steps. In the process they proceed gradually and when they do draw attention will stall programs until beginning again at a later date. North Korea has put that pattern aside and is in complete breakout.” “To give a U.S football comparison, they’re in the red zone and the quarterback is simply about to throw a pass into the end zone. The leader of North Korea is going for it and not hiding anything. The leadership in North Korea is hoping that the United States is bluffing and that they will be able to get a serviceable intercontinental ballistic missile (ICBM) with a hydrogen bomb that could threaten or destroy Los Angeles before the U.S could do anything. The United States is facing a six month window to act and I believe they will.”

The mess keeps getting bigger.

• Theresa May Apponts Cronies In ‘Sweeping Power Grab’ (Ind.)

Theresa May is poised to make an unprecedented attempt to fix the parliamentary system, allowing her to grab sweeping powers ahead of Brexit, The Independent can reveal. A late-night Commons vote to secure the Conservatives the muscle to use so-called “Henry VIII powers” to make new laws – behind the backs of MPs – will be staged next week. The move has been disguised on the Commons order paper under the innocuous description of “motions relating to House business”, but will be a decisive act in the Brexit process. It will allow the Tories to pack a crucial Commons committee with their own MPs, in defiance of Parliament’s rules, in order to carry out the power grab. To win the vote, the Conservatives will need the backing of the Democratic Unionist Party (DUP), under the much-criticised “cash-for-votes” deal that props up Ms May in power.

Opposition parties immediately accused the Prime Minister of a bid to “sideline Parliament and grant ministers unprecedented powers” – despite promises to restore sovereignty to MPs. “This is an unprecedented power grab by a minority government that lost its moral authority as well as its majority at the general election,” Valerie Vaz, Labour’s Shadow Commons Leader, told The Independent. And Alistair Carmichael, the Liberal Democrat chief whip, said: “The Tories seem determined to ram through their destructive hard Brexit even though they have no mandate for it.” The bid to seize control of the Committee of Selection comes despite unequivocal advice from parliamentary officials that the Tories must not do so, after losing their Commons majority at the election. Without the fix, it would be impossible to force through up to 1,000 “corrections” to EU law as intended through the EU (Withdrawal) Bill – the reason for the accusations of a power grab.

Europe 2.0 won’t be a democracy.

• At Democracy’s Birthplace, Macron Dreams Of Europe 2.0 (AP)

Standing at a Greek site where democracy was conceived, French President Emmanuel Macron called on members of the European Union to reboot the 60-year-old bloc with sweeping political reforms or risk a “slow disintegration.” Macron, on a visit on Thursday to Athens, urged EU nations to carry out six-month national reviews on EU reforms before imposing them — signaling his distance with the German-backed approach based on fiscal discipline within the eurozone. “It would be a mistake to abandon the European ideal,” Macron said. “We must rediscover the enthusiasm that the union was founded upon and change, not with technocrats and not with bureaucracy.” Elected by a landslide in May, the 39-year-old Macron has vowed to back efforts for closer integration in the EU, which has been rattled by a financial crisis, migration issues, a populist backlash and Britain’s decision to leave.

His proposal found enthusiastic support in bailout-stricken Greece, which considers France a vital ally and counterweight to fiscally hawkish Germany in its efforts to ease the stringent terms of its international rescue loans. Reinforcing his message, Macron urged the IMF to step back from its role in European bailouts — breaking with a widely accepted policy adopted when Greece sought international help seven years ago. “I don’t think it was the right method for the IMF to supervise European programs and intervene in the way it did,” he said. “Let’s work within Europe and not turn to outside agencies.” The eurozone rescue fund, the European Stability Mechanism, should play the lead role in financial rescue within the euro currency zone, he said. France, Europe’s No. 2 economy, had previously backed Germany’s insistence in involving the IMF to enforce austerity measures that came with bailout programs in Greece and other rescued economies including Ireland, Portugal and Cyprus.

Debt Rattle June 26 2017

Jun 262017

June 26, 2017 Posted by Raúl Ilargi Meijer at 9:29 am Finance Tagged with: BIS, bonds, crash, deflation, Greece, hydropower, Italy, Japan, recession, unwind, USD 3 Responses »

Pablo Picasso Etude Pour Mercure 1924

• The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)

• Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)

• Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)

• Four Pronged Proposal to End Japanese Deflation (Mish)

• Japan’s Bond Market Grinds To A Halt (ZH)

• “It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)

• A Stock Market Crash Scenario (CH Smith)

• The Fed Is Going to Cause a Recession (James Rickards)

• US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)

• The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)

• Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)

• Investors Call For Greece To Accelerate Reforms (K.)

• Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)

• China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

“..the end may come to resemble more closely a financial boom gone wrong..”

• The Next Global Crash Could Arrive ‘With A Vengeance’ – BIS (CNBC)

A new financial crisis is brewing in the emerging economies and it could hit “with a vengeance”, an influential group of central bankers has warned. Emerging markets such as China are showing the same signs that their economies are overheating as the US and the UK demonstrated before the financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS). Claudio Borio, the head of the BIS monetary and economic department, said a new recession could come “with a vengeance” and “the end may come to resemble more closely a financial boom gone wrong”. The BIS, which is sometimes known as the central bank for central banks and counts Bank of England Governor Mark Carney among its members, warned of trouble ahead for the world economy.

It predicted that central banks would be forced to raise interest rates after years of record lows in order to combat inflation which will “smother” growth. The group also warned about the threat poised by rising debt in countries like China and the rise in protectionism such as in the US under Donald Trump, City AM reported. Chinese corporate debt has almost doubled since 2007, now reaching 166% of GDP, while household debt rose to 44% of GDP last year. In May, Moody’s cut China’s credit rating for the first time since 1989 from A1 to Aa3 which could potentially raise the cost of borrowing for the Chinese government. The BIS’s credit-to-GDP gap indicator also showed debt, which is seen as an “early warning indicator” for a country’s banking system, is rising far faster than growth in other Asian economies such as Thailand and Hong Kong.

“The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.”

• Push On With The ‘Great Unwinding’, BIS Tells Central Banks (R.)

Major central banks should press ahead with interest rate increases, the Bank for International Settlements said on Sunday, while recognizing that some turbulence in financial markets will have to be negotiated along the way. The BIS, an umbrella body for leading central banks, said in one of its most upbeat annual reports for years that global growth could soon be back at long-term average levels after a sharp improvement in sentiment over the past year. Though pockets of risk remain because of high debt levels, low productivity growth and dwindling policy firepower, the BIS said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the “great unwinding” of quantitative easing programs and record low interest rates.

New technologies and working practices are likely to be playing a roll in suppressing inflation, it said, though normal impulses should kick in if unemployment continues to drop. “Since we are now emerging from a very long period of very accommodative monetary policy, whatever we do, we will have to do it in a very careful way,” BIS’s head of research, Hyun Song Shin, told Reuters. “If we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalization.” Shin added that it will be “very difficult, if not impossible” to remove all those bumps. The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.

The death of the dollar has been greatly exaggerated.

• Japanese Banks at Risk as Borrowing in Dollars Doubles – BIS (BBG)

Japanese banks have more than doubled their borrowing and lending in dollars since 2007, leaving them vulnerable to funding shocks such as those that exacerbated the last financial crisis, the Bank for International Settlements warned in a report released Sunday. Assets denominated in dollars on the balance sheets of Japanese banks surged to about $3.5 trillion by the end of 2016, the coordinating body for the world’s central banks said in its annual report about the global economy. Those exceed liabilities in dollars by about $1 trillion, creating a massive so-called long position in the currency. The report also cited Canadian lenders for following a similar trend, almost doubling their dollar exposure since the crisis. Their net long positions reached almost $200 billion, the BIS said.

European firms, by contrast, have reduced exposure to dollars since the crisis, the report said. German banks, which had among the highest net dollar positions in 2007, now have matching assets and liabilities denominated in the currency after cutting dollar assets by about half. During the financial crisis, European banks’ net dollar exposures, which peaked at $2 trillion, ended up causing several firms to collapse when funding sources dried up and their efforts to dump U.S. mortgage-related assets led to huge losses. Even as post-crisis regulation has strengthened banks’ capital resources to cope with such losses and some funding has shifted to more stable sources, risks haven’t been completely eliminated, according to the Basel, Switzerland-based group.

[..] the biggest portion of dollar funding for non-U.S. banks – $4.1 trillion – now comes from deposits outside the U.S., according to BIS data. That shift toward offshore dollar deposits also presents risks because the Federal Reserve’s funding backstop during the 2008 crisis wouldn’t be present in non-U.S. jurisdictions if dollar funds became scant, the BIS said. The Fed provided $538 billion of emergency loans to European banks that lost dollar funding from U.S. sources during the 2008 crisis ..

Is Mish missing out on confidence as a factor? You can lead a horse to water, but…

• Four Pronged Proposal to End Japanese Deflation (Mish)

Negative Sales Taxes People hoard cash, especially the miserly wealthy. We need to unlock that cash and put it to work. To free up this money, I propose negative sales taxes. The more you spend, the more money you get back as a direct tax credit against income taxes. I leave specific details to economists Larry Summers and Paul Krugman. What can possibly go wrong?

One Percent Tax Per Month on Government Bonds Negative interest rates are in vogue. However, all negative interest rates have done is to get those with money to hoard bonds. Bond buyers effectively bet on capital gains of still more negative rates. Phooey! Just yesterday I noted Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less. 33% cornering of the bond market is truly inadequate as this sentiment implies: Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank’s securities unit in Tokyo said “There are investors who have no choice but to buy.” We need to end this “no choice” hoarding sentiment right here, right now. I have just the solution. Tax government bonds at the rate of 1% per month.

No one will want them. Hedge funds and pension plans will dump sovereign bonds en masse. This will allow governments to buy every bond in existence immediately, if not sooner. As soon as the government corners the bond market (at effectively zero cost), debt and interest on the debt will truly be owed to itself. Once the bond market is 100% cornered, I propose government debt be declared null and void annually. This would effectively wipe out the entirety of Japan’s debt. Japan’s debt-to-GDP ratio would immediately plunge from 250% to 0%.

National Tax Free Lottery Japan desperately needs to get people to spend, continually. Once again, I have a logical proposal. For every purchase one makes on a credit card, that person gets a free lottery ticket for a weekly drawing worth $10,000,000 tax free. Each week, a random day of the week is selected and separately a random taxpayer ID is selected. If the person drawn made a credit card purchase exceeding $10 on the day of the week drawn, they win $10,000,000 tax free. If there is no winner, the amount rolls over. This beautiful plan will cost no more than $520 million annually, peanuts these days.

Hav-a-Kid Demographics in Japan are a huge problem. Although various incentives have been tried, none of them have gone far enough. I propose a reduction in income taxes for everyone starting a family. The following scale applies. One new child: 50% reduction in income taxes for a period of ten years. Two new children: 100% reduction in income taxes for a period of twenty years. Three new children: Subsidized housing, free healthcare, free schooling, and no income taxes for thirty years. Those with one new child in the last five years get full credit if they add at least one more child in the next five years.

Well, Mish does have the answer to that above: One Percent Tax Per Month

• Japan’s Bond Market Grinds To A Halt (ZH)

The Bank of Japan may or may not be tapering, but that may soon be moot because by the time Kuroda decides whether he will buy less bonds, the bond market may no longer work. As the Nikkei reports, while the Japanese central bank ponders its next step, the Japanese rates market has been getting “Ice-9ed” and increasingly paralyzed, as yields on newly issued 10-year Japanese government bonds remained flat for seven straight sessions through Friday while the BOJ continued its efforts to keep long-term interest rates around zero. The 10-year JGB yield again closed at 0.055%, where it has been stuck since June 15m and according to data from Nikkei affiliate QUICK, this marks the longest period of stagnation since 1994, Because what comes after record low volatility? Simple: market paralysis.

And that’s what Japan appears to be experiencing right now as private bondholders no longer dare to even breathe without instructions from the central bank. Meanwhile, the implied volatility of JGBs tumbled to the lowest level since January 2008 for the same reason we recently speculated may be the primary driver behind the global collapse in volatility: nobody is trading. This means that trading in newly issued 10-year debt has become so infrequent that broker Japan Bond Trading has seen days when no bonds trade hands. It’s not just cash bonds that find themselves in trading limbo: trading in short-term interest rate futures has also thinned and on Tuesday of last week the Nikkei reports that there were no transactions in three-month Tibor futures – the first time that has happened since such trading began in 1989.

As more market participants throw in the towel on a rigged, centrally planned market, the result will – no could – be a further loss of market function, and a guaranteed crash once the BOJ and other central banks pull out (which is why they can’t). As the Nikkei politely concludes, “if the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise.” Translation: in a world where only central banks trade, everyone else is destined to forget forget what trading, and certainly selling, means.

“..when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

• “It’ll Be An Avalanche”: Hedge Fund CIO Sets The Day Of The Next Crash (ZH)

While most asset managers have been growing increasingly skeptical and gloomy in recent weeks (despite a few ideological contrarian holdouts), joining the rising chorus of bank analysts including those of Citi, JPM, BofA and Goldman all urging clients to “go to cash”, none have dared to commit the cardinal sin of actually predicting when the next crash will take place. On Sunday a prominent hedge fund manager, One River Asset Management’s CIO Eric Peters broke with that tradition and dared to “pin a tail on the donkey” of when the next market crash – one which he agrees with us will be driven by a collapse in the global credit impulse – will take place. His prediction: Valentine’s Day 2018. Here is what Peters believes will happen over the next 8 months, a period which will begin with an increasingly tighter Fed and conclude with a market avalanche:

“The Fed hikes rates to lean against inflation,” said the CIO. “And they’ll reduce the balance sheet to dampen growing financial instability,” he continued. “They’ll signal less about rates and focus on balance sheet reduction in Sep.” Inflation is softening as the gap between the real economy and financial asset prices is widening. “If they break the economy with rate hikes, everyone will blame the Fed.” They can’t afford that political risk. “But no one understands the balance sheet, so if something breaks because they reduce it, they’ll get a free pass.”

“The Fed has convinced itself that forward guidance was far more powerful than QE,” continued the same CIO. “This allows them to argue that reversing QE without reversing forward guidance should be uneventful.” Like watching paint dry. “Balance sheet reduction will start slowly. And proceed for a few months without a noticeable impact,” he said. “The Fed will feel validated.” Like they’ve been right all along. “But when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”

One must remember there are no markets left. That makes talking about them dicey.

• A Stock Market Crash Scenario (CH Smith)

After 8+ years of phenomenal gains, it’s pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry’s slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely. Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months. My own scenario is based not on cycles or technicals or fundamentals, but on the psychology of the topping process, which tends to follow this basic script:

When there are too many bearish reports of gloomy data, and too many calls to go long volatility or go to cash, the market perversely goes up, not down. Why? This negativity creates a classic Wall of Worry that markets can continue climbing. (Central banks buying $300 billion of assets a month helps power this gradual ascent most admirably.) The Bears betting on a decline based on deteriorating fundamentals are crushed by the steady advance. As Bears give up, the window for a Spot of Bother decline creaks open, however grudgingly, as central banks make noises about ending their extraordinary monetary policies by raising interest rates a bit (so they can lower them when the next recession grabs the global economy by the throat). As bearish short interest and bets on higher volatility fade, insiders go short.

A sudden air pocket takes the market down, triggered by some bit of “news.” (Nothing like a well-engineered bout of panic selling to set up a profitable Buy the Dip opportunity.) And since traders have been well-trained to Buy the Dips, the Spot of Bother is quickly retraced. Nonetheless, doubts remain and fundamental data is still weak; this overhang of negativity rebuilds the wall of Worry. Some Bears will reckon the weakened market will double-top, i.e. be unable to break out to new highs given the poor fundamentals, and as a result we can anticipate a nominal new high after the Wall of Worry has been rebuilt, just to destroy all those who reckoned a double-top would mark The Top. Mr. Market (and the central banks) won’t make it that easy to reap a fortune by going short.

I think the Fed has already done that. By manoeuvering themselves into a position they cannot escape from.

• The Fed Is Going to Cause a Recession (James Rickards)

Why did the Federal Reserve (Fed) hike rates last week, and what will its policy look like in the future? They’re trying to prepare for the next recession. They’re not predicting a recession, they never do, but they know a recession will come sooner rather than later. This expansion is 96 months old. It’s one of the longest expansions in U.S. history. It’s also the weakest expansion in U.S. history. A lot of people say, “What expansion? Feels like a depression to me.” I think it is a depression defined as depressed growth, but we’re not in a technical recession and haven’t been since June 2009. So it’s been an eight-year expansion at this point, but it won’t fare well, and the Fed knows that. When the U.S. economy goes into recession, you have to cut interest rates about 3% to get the United States out of that recession. Well, how do you cut interest rates by 3% when you’re only at 1%?

The answer is, you can’t. You’ve got to get them up to 3% to cut them back down, maybe to zero, to get out of the next recession. So that explains why the Fed is raising interest rates. That’s the fourth rate hike getting them up to 1%. They would like to keep going; they would like to get them up to 3, 3.5% by 2019. My estimate is that they’re not going to get there. The recession will come first. In fact, they will probably cause the recession that they’re preparing to cure. So let’s just say we get interest rates to 1% and now you go into recession. We can cut them back down to zero. Well, now what do you do? You do a new round of QE. The problem is that the Fed’s balance sheet is so bloated at $4.5 trillion. How much more can you do—$5 trillion, $5.5 trillion, $6 trillion—before you cause a loss of confidence in the dollar? There are a lot of smart people who think that there’s no limit on how much money you can print. “Just print money. What’s the problem?”

I disagree. I think there’s an invisible boundary. The Fed won’t talk about it. No one knows what it is. But you don’t want to find out the hard way. [..] You probably want to get from $4.5 trillion, down to $2.5 trillion. Well, you can’t sell any treasury bonds. You destroy the market. Rates would go up, putting us in recession, and the housing market would collapse. They’re not going to do that. What they’re going to do is just let them mature. When these securities mature, they won’t buy new ones. They won’t roll it over, and they actually will reduce the balance sheet and make money disappear. They’re going to do it in tiny increments, maybe $10 billion a month or $20 billion a month. They want to run this quantitative tightening in small increments and pretend nothing’s happening. But that’s nonsense. It’s just one more way of tightening money in a weak economy; it will probably cause a recession.

Views on the dollar are all over the place.

• US Dollar Will Strengthen on Fed Hikes – Credit Agricole (CNBC)

While investors seem to have come to a consensus view that the U.S. dollar rally is coming to an end, Credit Agricole has offered a contrarian take: There is room for the greenback to strengthen. David Forrester, the bank’s FX strategist told CNBC Monday that markets have been predominantly focused on U.S. inflation data and pricing in an overly cautious Federal Reserve. But, he thinks the Fed will be more hawkish than what is currently expected, which will support the U.S. dollar. “The Fed seems to have changed its policy response function. Yes it’s going to pay attention to the data, but less so. It now wants to get its rates normalized so that it actually has room to cut rates in the next downturn,” Forrester said.

“Let’s not forget here: The U.S. expansion, while being soft, is actually pretty mature so the Fed is getting lined up here in preparation for the next downturn. That’s why we think they’re going to hike rates and we will see a steepening of the U.S. Treasury curve and that will be supportive of the U.S. going forward.” Credit Agricole expects the Fed to hike rates once more this year, followed by three times in 2018. U.S. inflation — still below its 2% target despite a low unemployment rate — has been a key point in the argument on whether the Fed should continue normalizing rates. Forrester said the divergence between the unemployment rate and inflation is not unique to the U.S. Globally, economies face structural issues such as ageing populations and automation replacing jobs, which could increase the risks of a recession.

But, he said U.S. inflation should pick up on the back of further wage growth and a rebound in oil prices. “We expect the U.S. economy to continue to recover and strengthen, we will believe in the Philips curve in the U.S. We do expect wages growth to accelerate and inflation expectation(s) to pick back up. So all-in-all, we do expect that re-steepening,” he said. The Philips curve relates to a supposed inverse relationship between the level of unemployment and the inflation rate. Forrester’s views are in contrast to that of many analysts, who expect weakness in the U.S. dollar. Ken Peng, Asia investment strategist at Citi Private Bank, told CNBC’s “Squawk Box” that the greenback is headed for a “new cycle” after a six-year rally since 2011. He added that the dollar weakness will be “one of the greatest market trends” for global investors.

Desperately seeking something.

• The $1.5 Trillion US Business Tax Change Flying Under the Radar (WSJ)

Republicans looking to rewrite the U.S. tax code are taking aim at one of the foundations of modern finance—the deduction that companies get for interest they pay on debt. That deduction affects everyone from titans of Wall Street who load up on junk bonds to pay for multibillion-dollar corporate takeovers to wheat farmers in the Midwest looking to make ends meet before harvest. Yet a House Republican proposal to eliminate the deduction has gotten relatively little sustained public attention or lobbying pressure. Thanks in part to the deduction, the U.S. financial system is heavily oriented toward debt, which because of the tax code is often cheaper than equity financing—such as sales of stock. It also is widely accessible. In 2015, U.S. businesses paid in all $1.3 trillion in gross interest, according to Commerce Department data, equal in magnitude to the total economic output of Australia.

Getting rid of the deduction for net interest expense, as House Republicans propose, would alter finance. It also would generate about $1.5 trillion in revenue for the government over a decade, according to the Tax Foundation, a conservative-leaning think thank. The plan would raise money to help offset Republicans’ corporate tax cuts and reduce a “huge bias” toward debt financing, said Robert Pozen, a senior lecturer at MIT’s Sloan School of Management. That bias, he said, hurts companies built around innovation, which tend to not have the physical assets that banks usually require as collateral. [..] Midsize businesses may also get squeezed. “The people that utilize debt, they utilize it because they don’t have the cash and they don’t have the access to equity,” said Robert Moskovitz, CFO of Leaf Commercial Capital, which finances businesses’ purchases of items like copiers and telephone systems.

“A dry cleaner in Des Moines, Iowa? Where is he going to get equity? He can’t do an IPO.” The idea behind the Republican plan is to pair the elimination of this deduction with immediate deductions for investments in equipment and other long-lived assets. Party leaders expect the capital write-offs would encourage more investment and growth and greater worker productivity, but not the debt often associated with it.

Dijsselbloem et al made a big circus about how taxpayers would never again foot the bill. It was never worth a thing.

“German conservative MEP Markus Ferber (EPP): “With this decision, the European Commission accompanies the Banking Union to its deathbed. The promise that the tax payer will not stand in to rescue failing banks anymore is broken for good. I am very disappointed that the commission has approved this course of action. By doing so the Commission has massively undermined the credibility of the Banking Union. If the common set of rules governing banking resolution is so blatantly ignored, there is no point in negotiating any further on a common deposit insurance scheme. The precondition for a working Banking Union is a common understanding of its rules. If such a basic common understanding is lacking, there is no point in further deepening the Banking Union and mutualising risk.”

• Two Failed Italian Banks Split Into Good And Bad Banks, Taxpayers Pay (G.)

The Italian government is stepping in to wind up two failing lenders and prevent a bank run, at a total cost of up to €17bn. After an emergency cabinet meeting on Sunday, ministers agreed to a decree splitting Veneto Banca and Banca Popolare di Vicenza into ‘good’ and ‘bad’ banks, keeping branches open. The ‘good’ assets are being acquired by Italy’s biggest retail bank, Intesa Sanpaolo, with the Italian government handing about €5bn to Intesa as part of the deal. The lenders will then be liquidated, which leaves the state footing the bill for bad loans on both banks’ books, plus restructuring costs.

The Italian government would provide state guarantees worth up to €12bn to cover potential losses at the ‘bad’ bank, Pier Carlo Padoan, the finance minister, told reporters in Rome. That means the total cost could reach €17bn. Padoan added that both banks would operate normally on Monday. The deal is meant to ward off the threat of a bank run, by reassuring nervous savers and deterring them from withdrawing their funds when branches reopen. Paolo Gentiloni, Italy’s prime minister, insisted that the decree fully respected EU rules, even though taxpapers are no longer meant to stump the cost to rescue a failing bank. The funds will come from a €20bn fund created last year to help struggling lenders, so will not affect Italy’s public borrowing, according to the government.

Lower pensions solve everything.

• Investors Call For Greece To Accelerate Reforms (K.)

The return of investor confidence in Greece will require time and the acceleration of the government’s reform program, foreign fund managers told Greek officials during two investment conferences that took place in the last couple of weeks in New York and London with the participation of Greek listed firms. In their meetings with hundreds of funds from the US and Europe, the representatives of Greek companies said that while the recent Eurogroup decision may have banished uncertainty about Greece, the government will need to put in some serious effort and work in addressing the issues of speed and efficiency. This was after Greece had failed to secure any debt-easing measures, while the entry of Greek bonds to the ECB’s QE remains pending.

The main subject at the two investment events was the titanic effort being made by Greek banks to reduce the bad loans in their portfolios. As for the Athens stock market, Alpha Finance noted in its presentation at the 6th Greek Investment Forum in New York on June 21-22 that “there is a light at the end of the tunnel.” The Alpha Bank subsidiary noted that “the Greek market has recorded bigger returns than its European peers and prospects appear very encouraging as Greece has beaten its fiscal targets and restored investor confidence in the timetable of the Greek [bailout] program.”

“the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.”

• Germans Fearing China’s World Order? Worry About The EU Instead (CNBC)

Criticizing what he saw as Washington’s isolationist bent, German Finance Minister Wolfgang Schäuble voiced a concern in a speech earlier this month that the West could be threatened as China (and Russia) might fill the void. That, he feared, “would be the end of our liberal world order.” He also said that the U.S. was no longer willing to act as a “guardian of global order,” apparently because Washington withdrew from the agreement on climate change, and it allegedly showed no interest for cooperative migration and security policies. The U.S. Department of State has probably something to say about that, but I wish Schäuble were at least partly right. Arguably, the U.S. could cut back on some foreign engagements and pay more attention to pressing domestic problems.

That said, I wonder how the German minister fails to see that the U.S. is all over the map in active, proxy and hybrid warfare — Afghanistan, the Middle East and North Africa, Korean Peninsula, Central and Eastern Europe and the South China Sea. What else would he want? A nuclear war with China and Russia? Germany may wish to think about whether it is in its interest to fuel and broaden the points of friction with the United States. In my view, Berlin should leave the big power dealings alone. Washington and Beijing are engaged on a broad range of issues to build a historically unique relationship between an established superpower and a runner-up that needs space to develop and contribute to the world in peace and harmony. In trying to do that, the two countries are blazing totally new trails of modern statecraft.

Ubiquitous analogies of Sparta (an established power) and Athens (a rapidly developing strategic competitor), and their ensuing Peloponnesian War, are worthless in the case of countries with huge nuclear arsenals and ground, sea, air and airspace delivery vehicles. So, yes, Germany should leave that alone and get over its fury at Washington’s decision to stop the hemorrhage of foreign trade accounts that are killing jobs, incomes and whatever is left of American manufacturing industries. China got that message and is doing something about it. In the first four months of this year, American export sales to China soared 16.1%. By contrast, U.S. exports to the EU, which account for one-fifth of the total, barely eked out a 2.7% increase.

Germany has to make up its mind with regard to the European integration. Bullying the Visegrad Group (and Baltic States) — a task that Germany has subcontracted to France due to dark pages of its history — and pillorying Greece (a task Germany was eager to continue) won’t work. These countries will run to the U.S. for cover, as some of them are doing now by demanding large contingents of U.S. armed forces on their soil. Also, the U.S. will not be indifferent to the mistreatment of the long suffering Greece. That is America’s key strategic base in the Mediterranean, and a location of new military installations on the island of Crete to monitor the Middle East.

Proud supporters of the Paris Agreement.

• China’s Hydropower Frenzy Drowns Sacred Mountains (AFP)

Beijing is building hydropower at a breakneck pace in ethnically Tibetan regions as part of an ambitious undertaking to reduce the country’s dependence on coal and cut emissions that have made it the world’s top polluter. China had just two dams in 1949, but now boasts some 22,000 – nearly half the world total – in all but one of the country’s major waterways. Mountains and rivers are revered as sacred in Tibetan Buddhism, and the extensive construction, which began in 2014, has alarmed locals who believe they can only live peacefully if the nature around them is protected. “Last year, people said that a big forest fire happened because they blasted a road into the holy mountain, and it took revenge,” said villager Tashi Yungdrung, who tends a small herd of yaks in the pastures above her stone, square-windowed home.

Most would not dare remove so much as a single stone from the mountain Palshab Drakar, an important pilgrimage site, she said. Villagers are bracing for mass relocations, an experience that has previously caused havoc elsewhere in China. Beginning in the 1990s, more than a million were moved for the Three Gorges Dam, the world’s largest in terms of capacity, with thousands still mired in poverty. Plans posted at the Lianghekou construction site showed that 22 power plants will be built along the Yalong, a Yangtze tributary, collectively capable of generating 30 gigawatts of electricity – a fifth of China’s current total installed hydropower capacity. Li Zhaolong, a Tibetan from Zhaba village, said he received 300,000 yuan ($44,000) in government compensation to build a new home on higher ground, where he will move next year.

But the 28,000 yuan moving fee his family received per person will not last long once their crops are submerged and they have no other sources of income. “Before we were farmers, and now we have no land,” said Li. [..] Some 80% of China’s hydropower potential lies along the high-flow, glacier-fed rivers of the Tibetan plateau, but dams there bring minimal local benefits because most of the power goes to smog-choked cities in the east, according to the non-governmental organisation International Rivers. Construction worker Zeng Qingtao said the state-owned Power Construction Corporation had brought in some 10,000 employees, but none are locals. “We can’t hire Tibetans. They aren’t reasonable,” he said.

Debt Rattle November 21 2016

Nov 212016

November 21, 2016 Posted by Raúl Ilargi Meijer at 9:56 am Finance Tagged with: APEC, debt, exports, greed, Hillary, imports, Japan, recession, savings, TPP, Trump, Tsipras 3 Responses »

NPC Fordson tractor exposition at Camp Meigs, Washington DC 1922

• Japan Exports Drop 13th Month By 10.3%, Imports Down 22nd Month By 16.5% (WSJ)

• Negative Rates Are Failing to Halt Savings Obsession in Europe (BBG)

• More Than 1 in 3 European Workers Have Difficulty Making Ends Meet (ETUC)

• Now it Begins to Unravel (WS)

• Former UBS, Credit Suisse CEO: “A Recession Is Sometimes Necessary” (ZH)

• Big Shock In France’s Presidential Election As Sarkozy Eliminated (BBG)

• The EU’s New Bomb Is Ticking in the Netherlands (WSJ)

• APEC Summit Closes With Call for More Globalization, Free Trade (AP)

• Obama Says World Leaders Want To Move Forward With TPP (AFP)

• The Grey Champion Assumes Command – Part 1 (Quinn)

• The Silver Lining In This Disaster: Clinton & Co Are Finally Gone (G.)

• Disaffected Rust Belt Voters Embraced Trump. They Had No Other Hope (G.)

• Tsipras Ready To Give In On Labor Reform To Ensure Debt Relief (Kath.)

With trade growth goes globalization.

• Japan Exports Drop 13th Month By 10.3%, Imports Down 22nd Month By 16.5% (WSJ)

Japanese exports extended their losses to a 13th straight month in October, indicating that the world’s third-largest economy has yet to regain full fitness despite better-than-expected growth in the third quarter. Exports fell 10.3% from a year earlier in October to 5.870 trillion yen, figures released Monday by the Ministry of Finance showed. The reading came in worse than a 9.4% drop forecast by economists polled by WSJ. Exports decreased 6.9% in September. Despite the grim monthly figures, exports appear to be in better shape than in the spring, when Japan’s manufacturers were being buffeted by worries over a Chinese slowdown and other headwinds from abroad. Government estimates released last week showed that Japan’s economy grew 2.2% from the previous quarter in the July-September period, beating economists’ expectations.

Exports were stronger than in the previous three months. The near-term prospects for exports have also improved after Donald Trump’s victory of U.S. presidential election put the yen’s previous uptrend in reversal. The finance ministry said export volumes for October fell 1.4% from their year-earlier levels. That marked the first fall in three months. But seasonally adjusted month-on-month figures showed exports increased 1.6%. Imports declined 16.5% on year in October to Y5.374 trillion, the 22nd consecutive month of contraction, the ministry said. Japan’s trade balance came to Y496.2 billion in surplus, according to the data. Economists polled by the Nikkei expected a surplus of Y610.0 billion.

Anything reported as a ‘savings obsession’ can be filed under ‘fake news’. It takes this article a while to get to it, but then it does: “About 44% of all Europeans were unable to pay at least one bill on time during the last 12 months, mainly because of a lack of money..” Combine that with the accounting practice of filing ‘paying off debts’ under ‘saving’, and you know what’s really happening.

• Negative Rates Are Failing to Halt Savings Obsession in Europe (BBG)

After years of turbo-driven central bank stimulus, most Europeans still want to leave their spare cash in savings accounts, even if those accounts pay zero interest. That’s the finding of a survey by Europe’s biggest debt collector, Stockholm-based Intrum Justitia AB. “After the financial crisis, people have felt a need – even if they have small means – to create some kind of security,” CEO Mikael Ericson said in an interview in Stockholm on Nov. 16. “It can’t be that people save in a bank account because of the fantastic returns, so it must be about a sense of security, having money in the bank.” Some 69% of Europeans put their savings into bank accounts, according to Intrum Justitia’s European Consumer Payment Report.

The survey is based on feedback gathered in September and covers about 21,000 people in 21 countries. The survey also shows that 26% of Europeans prefer keeping their surplus funds in cash, while 16% hold stocks. Only 14% turn to investment funds, 8% invest in real estate and 8% in bonds. In Denmark and Sweden, where central bank benchmark rates are negative, almost 80% of people put their surplus cash in bank accounts. In France, the U.K. and the Netherlands, the figure is above 80%. [..] The survey also revealed how financially fragile many Europeans continue to be almost half a decade after the region’s debt crisis. About 44% of all Europeans were unable to pay at least one bill on time during the last 12 months, mainly because of a lack of money, the survey found. Greece was worst, with 76% of households failing to pay on time.

Yeah. Savings Obsession. Sure.

• More Than 1 in 3 European Workers Have Difficulty Making Ends Meet (ETUC)

According to the European Working Conditions Survey launched today more than one third of workers report some or great difficulty in making ends meet. This is the reality behind the rosier picture painted by the European Foundation for the Improvement of Living and Working Conditions which highlights an “increasingly skilled workforce, largely satisfied with work”. However, the study also reveals that • A shocking 1 in 5 workers “has a poor quality job with disadvantageous job quality features and job holders …. reporting an unsatisfactory experience of working life.” • Only 1 in 4 workers have “a smooth running job where most dimensions of job quality are satisfactory”.

Luca Visentini, General Secretary of the European Trade Union Confederation said “European workers are struggling to make ends meet. Work no longer assures a decent life. Is it any wonder that more and more voters are losing their faith in “the European Union and mainstream political parties? ”These results only strengthen the ETUC’s determination to fight for more public investment to create quality jobs, and for a pay rise for European workers to tackle poverty and drive economic recovery for all. Economic policies that result in 1 in 3 workers struggling to make ends meet are fundamentally wrong and must be radically changed.” “These are deeply worrying results that cannot be hidden by claiming that the world of work is increasingly complex. The survey actually shows that work is unsatisfactory or unrewarding for far too many workers.”

“The picture painted by the European Working Conditions Survey of widespread poverty in improving working conditions highlights the need for a comprehensive approach to tackle inequality across Europe. Improvements in labour markets and working conditions are modest and uneven at best; what’s more, these are being wiped out by spiralling costs of housing and austerity policies that drive insecurity for workers and their families.”

“Debt is good” is just another way of saying “Greed is good”.

• Now it Begins to Unravel (WS)

Debt is good. More debt is better. Funding consumer spending with debt is even better – that’s what economists have been preaching – because the consumed goods and services are gone after having been added to GDP, while the debt, which GDP ignores, remains until it is paid off with future earnings, or until it blows up. Corporations too have gone on a borrowing binge. Unlike consumers, they have no intention of paying off their debts. They issue new debt and use the proceeds to pay off maturing debts. Funding share-buybacks and dividends with debt is ideal. It’s called “unlocking value.” Debt must always grow. For that purpose, the Fed has manipulated interest rates to rock bottom. Actually paying off and reducing debt has the dreadful moniker, bandied about during the Financial Crisis, “deleveraging.”

It’s synonymous with “The End of the World.” At the institutional level, “debt” is replaced with more politically correct “leverage.” More leverage is better. Particularly if you can borrow short-term at near zero cost and bet the proceeds on risky illiquid long-term assets, such as real estate, or on securities that become illiquid without notice. Derivatives are part of this institutional equation. The notional value of derivatives in the US banking system is $190 trillion, according to the Office of the Comptroller of the Currency. Four banks hold over 90% of them: JP Morgan ($53 trillion), Citibank ($52 trillion), Goldman ($44 trillion), and Bank of America ($26 trillion). Over 75% of those derivative contracts are interest rate products, such as swaps.

With them, heavily leveraged institutional investors that borrow short-term to invest in illiquid long-term assets hedge against interest rate movements. But Treasury yields and mortgage rates have moved violently in recent weeks, and someone is out some big money. These credit bubbles always unravel to the greatest surprise of those institutions and their economists. When they unravel, the above “End-of-the-World” scenario of orderly deleveraging turns into forced deleveraging, which can get messy. Assets that had previously been taken for granted are either repriced or just evaporate. But they’d been pledged as collateral. Suddenly, the collateral no longer exists….

“..the Swiss National Bank’s balance sheet now accounts for 100% of GDP. Japan is also 100%, but mainly invested in its own state paper. The ECB and the Fed are 30%.”

• Former UBS, Credit Suisse CEO: “A Recession Is Sometimes Necessary” (ZH)

Remember when bashing central banks and predicting financial collapse as a result of monetary manipulation and intervention was considered “fake news” within the “serious” financial community, disseminated by fringe blogs? Good times. In an interview with Swiss Sonntags Blick titled appropriately enough “A Recession Is Sometimes Necessary”, the former CEO of UBS and Credit Suisse, Oswald Grübel, lashed out by criticizing the growing strength of central banks and their ‘supremacy over the markets and other banks’. He claimed that the use of negative interest rates and huge positive balance sheets represent ‘weapons of mass destruction’. He calls for an end to the use of negative interest rates. Sounding more like a “tinfoil” blog than the former CEO of the two largest Swiss banks, Grübel warned that central banks have “crossed the point of no return” which will ultimately “end in a crash.”

Joining Deutsche Bank in slamming NIRP, Grubel said that banks are losing hundreds of millions of francs each year to negative interest rates paid to central banks. Worse, he warned that central banks will eventually lose their credibility in the markets but that this could take 10 years or more, at which point it will “all end in a crash.” What happens then? The former CEO believes that the final outcome will be wholesale financial nationalization: “after that all banks could belong to the state” Grubel also the doubted the wisdom of the Swiss National Bank’s balance sheet: “the Swiss National Bank’s balance sheet now accounts for 100% of GDP. Japan is also 100%, but mainly invested in its own state paper. The ECB and the Fed are 30%. Switzerland is far, far, far ahead. Is that wise?”

Grübel also touched on a point we have made ever since 2010 when we said that in a world of unprecedented political polarity, politicians now control the world almost exclusively through monetary policy, to wit: “After the financial crisis, politics has taken power in the banking sector: It has bound the banks into a regulatory corset and now they can no longer move. Politicians have told central banks: now you determine what is going on with the economy.” What are the implications of this power shift? “Previously, the risk was distributed to thousands of banks. They had to pay for their mistakes. The risk lay with the shareholders. Today, more and more the state carries the risk.” Which, of course, is another word for taxpayers. In other words, the next crash will be one where central – not commercial – banks are failing, and the one left with the bill will once again be the ordinary person in the street.

In a tangent, Grübel gave his thoughts on what makes a man rich: “rich is a man when he goes to bed in a carefree manner and wakes up without care.” He is then asked if, by that definition, a billionaire is rich to which he replied: “No. Money has little to do with wealth. The real rich are carefree. Those who are healthy, are not dependent. The greatest wealth is independence.”

“..the winner will be favorite to become president in May..”. Really? Then why am I thinking Le Pen is the favorite?

• Big Shock In France’s Presidential Election As Sarkozy Eliminated (BBG)

Former Prime Minister Francois Fillon, the new front-runner in France’s 2017 presidential election, is offering voters an economic-policy revolution inspired by Margaret Thatcher. Fillon, 62, vaulted from third position in most polls to win the first round of the Republican primary by 16 percentage points from the veteran Alain Juppe on Sunday with the most free-market platform among the seven candidates. They’ll face each other again in next Sunday’s runoff and the winner will be favorite to become president in May 2017. The lifelong politician is pledging to lengthen the work week to 39 hours from 35, to increase the retirement age to 65 and add immigration quotas. He’s vowed to eliminate half a million public-sector jobs and cut spending by €100 billion over his five years in office.

And he proposes a €40 billion tax-cut for companies and a constitutional ban on planned budget deficits. “Who is Fillon? The classic conservative, right-wing candidate,” Bruno Cautres, a political scientist at the Sciences Po Institute in Paris, said in an interview. “He wants a deep reform of the French model: shrinking the role of the state and cutting the welfare system.” Compared with the brash style of former boss, Nicolas Sarkozy, Fillon has a more low-key approach but he makes a virtue of telling it straight. When he took office as premier in 2007, he shocked even Sarkozy by announcing that France was a bankrupt state. Today he’s promising to reverse that, just like his role model when she became U.K. prime minister in 1979.

Europe and the scourge of direct democracy.

• The EU’s New Bomb Is Ticking in the Netherlands (WSJ)

If the European dream is to die, it may be the Netherlands that delivers the fatal blow. The Dutch general election in March is shaping up to be a defining moment for the European project. The risk to the EU doesn’t come from Geert Wilders, the leader of anti-EU, anti-immigration Party for Freedom. He is well ahead in the polls and looks destined to benefit from many of the social and economic factors that paved the way for the Brexit and Trump revolts. But the vagaries of the Dutch political system make it highly unlikely that Mr. Wilders will find his way into government. As things stand, he is predicted to win just 29 out of the 150 seats in the new parliament, and mainstream parties seem certain to shun him as a coalition partner. In an increasingly fragmented Dutch political landscape, most observers agree that the likely outcome of the election is a coalition of four or five center-right and center-left parties.

Instead, the risk to the EU comes instead from a new generation of Dutch euroskeptics who are less divisive and concerned about immigration but more focused on questions of sovereignty—and utterly committed to the destruction of the EU. Its leading figures are Thierry Baudet and Jan Roos, who have close links to British euroskeptics. They have already scored one significant success: In 2015, they persuaded the Dutch parliament to adopt a law that requires the government to hold a referendum on any law if 300,000 citizens request it. They then took advantage of this law at the first opportunity to secure a vote that rejected the EU’s proposed trade and economic pact with Ukraine, which Brussels saw as a vital step in supporting a strategically important neighbor. This referendum law is a potential bomb under the EU, as both Dutch politicians and Brussels officials are well aware.

Mr. Baudet believes he now has the means to block any steps the EU might seek to take to deepen European integration or stabilize the eurozone if they require Dutch legislation. This could potentially include aid to troubled Southern European countries such as Greece and Italy, rendering the eurozone unworkable. Indeed, the Dutch government gave a further boost to Mr. Baudet and his allies when it agreed to accept the outcome of the Ukraine referendum if turnout was above 30%, even though it was under no legal obligation to do so. This was a major concession to the euroskeptics, as became clear when strong turnout among their highly motivated supporters lifted overall turnout to 31%. With Mr. Wilders’s party, currently polling above 25%, and both Mr. Baudet and Mr. Roos having launched their own parties, Dutch euroskeptics are confident they will be able to reach the 30% threshold in future referendums.

Do they mean things would have been even worse without free trade? (if they do, let them say so): “..the benefits of trade and open markets need to be communicated to the wider public more effectively, emphasizing how trade promotes innovation, employment and higher living standards.”

• APEC Summit Closes With Call for More Globalization, Free Trade (AP)

Leaders of 21 Asia-Pacific nations ended their annual summit Sunday with a call to resist protectionism amid signs of increased free-trade skepticism, highlighted by the victory of Donald Trump in the U.S. presidential election. The Asia Pacific Economic Cooperation forum also closed with a joint pledge to work toward a sweeping new free trade agreement that would include all 21 members as a path to “sustainable, balanced and inclusive growth,” despite the political climate. “We reaffirm our commitment to keep our markets open and to fight against all forms of protectionism,” the leaders of the APEC nations said in a joint statement. APEC noted the “rising skepticism over trade” amid an uneven recovery since the financial crisis and said that “the benefits of trade and open markets need to be communicated to the wider public more effectively, emphasizing how trade promotes innovation, employment and higher living standards.”

Speaking to journalists at the conclusion of the summit, Peruvian President Pedro Pablo Kuczynski said the main obstacle to free trade agreements in Asia and around the world is the frustration felt by those left behind by globalization. “Protectionism in reality is a reflection of tough economic conditions,” said Kuczynski, the meeting’s host. Referring to Brexit and Trump’s election win in the U.S., he said those results highlighted the backlash against globalization in former industrial regions in the U.S. and Britain that contrasts with support for trade in more-prosperous urban areas and developing countries. “This is an important point in recent economic history because of the outcome of various elections in very important countries that have reflected an anti-trade, anti-openness feeling,” he said.

Fuhget about it.

• Obama Says World Leaders Want To Move Forward With TPP (AFP)

US President Barack Obama said Sunday that leaders from across the Asia-Pacific have decided to move ahead with a trade deal opposed by his successor Donald Trump. “Our partners made clear they want to move forward with TPP,” Obama said at a press conference after meeting leaders in Peru. “They would like to move forward with the United States.” It is unclear whether there is any future for the TPP, a vast, arduously negotiated agreement between 12 countries that are currently at different stages of ratifying it. It does not include China. Trump campaigned against the proposal as a “terrible deal” that would “rape” the United States by sending American jobs to countries with cheaper labor.

The agreement must by ratified in the US Congress – which will remain in the hands of Trump’s Republican allies when the billionaire mogul takes office on January 20. Without the United States, it cannot be implemented in its current form. However, some have suggested Trump could negotiate a number of changes and then claim credit for turning the deal around. Obama defended the increasing integration of the global economy at the close of his final foreign visit as president – a trade summit held against the backdrop of rising protectionist sentiment in the United States and Europe, seen in both Trump’s win and Britain’s “Brexit” vote. He said that “historic gains in prosperity” thanks to globalization had been muddied by a growing gap “between the rich and everyone else.” “That can reverberate through our politics,” he said.

Jim Quinn’s longtime series on the Fourth Turning continues. A problem might be that you can’t really know who’s who until afterwards. Maybe Mike Pence will turn out to be the real grey champion, or someone as yet unknown.

• The Grey Champion Assumes Command – Part 1 (Quinn)

In September 2015 I wrote a five part article called Fourth Turning: Crisis of Trust. In Part 2 of that article I pondered who might emerge as the Grey Champion, leading the country during the second half of this Fourth Turning Crisis. I had the above pictures of Franklin, Lincoln, and FDR, along with a flaming question mark. The question has been answered. Donald J. Trump is the Grey Champion. When I wrote that article, only one GOP debate had taken place. There were eleven more to go. Trump was viewed by the establishment as a joke, ridiculed by the propaganda media, and disdained by the GOP and Democrats. I was still skeptical of his seriousness and desire to go the distance, but I attempted to view his candidacy through the lens of the Fourth Turning. I was convinced the mood of the country turning against the establishment could lead to his elevation to the presidency. I was definitely in the minority at the time:

“Until three months ago the 2016 presidential election was in control of the establishment. The Party was putting forth their chosen crony capitalist figureheads – Jeb Bush and Hillary Clinton. They are hand-picked known controllable entities who will not upset the existing corrupt system. They are equally acceptable to Goldman Sachs, the Federal Reserve, the military industrial complex, the sickcare industry, mega-corporate America, the moneyed interests, and the never changing government apparatchiks. The one party system is designed to give the appearance of choice, while in reality there is no difference between the policies of the two heads of one party and their candidate products. But now Donald Trump has stormed onto the scene from the reality TV world to tell the establishment – You’re Fired!!!”

Strauss and Howe wrote their prophetic tome two decades ago. [..] They did not know which events or which people would catalyze this Fourth Turning. But they knew the mood change in the country would be driven by the predictable generational alignment which occurs every eighty years. “Soon after the catalyst, a national election will produce a sweeping political realignment, as one faction or coalition capitalizes on a new public demand for decisive action. Republicans, Democrats, or perhaps a new party will decisively win the long partisan tug of war. This new regime will enthrone itself for the duration of the Crisis. Regardless of its ideology, that new leadership will assert public authority and demand private sacrifice. Where leaders had once been inclined to alleviate societal pressures, they will now aggravate them to command the nation’s attention. The regeneracy will be solidly under way.” – Strauss & Howe – The Fourth Turning

“This is a revolutionary moment. We must not allow them to shift the blame on to voters. This is their failure, decades in the making.”

• The Silver Lining In This Disaster: Clinton & Co Are Finally Gone (G.)

Hillary Clinton has given us back our freedom. Only such a crushing defeat could break the chains that bound us to the New Democrat elites. The defeat was the result of decades of moving the Democratic party – the party of FDR – away from what it once was and should have remained: a party that represents workers. All workers. For three decades they have kept us in line with threats of a Republican monster-president should we stay home on election day. Election day has come and passed, and many did stay home. And instead of bowing out gracefully and accepting responsibility for their defeat, they have already started blaming it largely on racist hordes of rural Americans. That explanation conveniently shifts blame away from themselves, and avoids any tough questions about where the party has failed.

In a capitalist democracy, the party of the left has one essential reason for existing: to speak for the working class. Capitalist democracies have tended towards two major parties. One, which acts in the interest of the capitalist class – the business owners, the entrepreneurs, the professionals – ensuring their efforts and the risks they took were fairly rewarded. The other party represented workers, unions and later on other groups that made up the working class, including women and oppressed minorities. This delicate balance ended in the 1990s. Many blame Reagan and Thatcher for destroying unions and unfettering corporations. I don’t. In the 1990s, a New Left arose in the English-speaking world: Bill Clinton’s New Democrats and Tony Blair’s New Labour. Instead of a balancing act, Clinton and Blair presided over an equally aggressive “new centrist” dismantling of the laws that protected workers and the poor.

[..] .. let us be as clear about this electoral defeat as possible, because the New Democratic elite will try to pin their failure, and keep their jobs, by blaming this largely on racism, sexism – and FBI director Comey. This is an extremely dangerous conclusion to draw from this election. So here is our silver lining. This is a revolutionary moment. We must not allow them to shift the blame on to voters. This is their failure, decades in the making. And their failure is our chance to regroup. To clean house in the Democratic party, to retire the old elite and to empower a new generation of FDR Democrats, who look out for the working class – the whole working class.

What happens when you think the economy means the rich.

• Disaffected Rust Belt Voters Embraced Trump. They Had No Other Hope (G.)

The industrial midwest is the vast sweep, from western Pennsylvania through eastern Iowa, that drove the American economy for nearly a century. The great industrial cities, such as Chicago and Detroit, led the way, but it spread into hundreds of small towns and cities – from the steel mills of Ohio to the auto parts factories of Michigan and Wisconsin and the appliance makers of Iowa and Illinois. This was Hillary Clinton’s blue wall, the states she had to win to become president. Of the 11 swing states that decided the election, five – Pennsylvania, Ohio, Michigan, Wisconsin and Iowa – lie in this battered old industrial heartland. If, as expected, Trump’s lead in Michigan holds, she lost them all. How did it happen? There are many reasons. The Clinton team barely campaigned there and in Wisconsin until it was too late.

Misogyny played a role. So did Clinton’s personal unpopularity and the relatively low turnout. But the real reason is that the industrial era created this region and gave a good middle-class way of life to the people who worked there. That economy began to vanish 40 years ago, moving first to the sun belt and then Mexico, before finally China. The good jobs that were left increasingly went to robots. Factories closed. So did the stores and bars and schools around them. The brightest kids fled to universities and then to the cities – to New York or Chicago or the state capital. Those left behind worked two or three non-union jobs just to stay afloat. Families broke up. Drug use increased. Life spans shortened. And nobody seemed to care – until Trump. But does he really? Who knows? He said he did.

His tirades – against trade, against elites, against Obamacare, against immigrants, against the Clintons – sounded like unhinged rants in cities and on campuses, which never took him seriously. In the old industrial zones and withering farm towns, he echoed their own resentments. Mitt Romney couldn’t do this; neither could John McCain. But Trump did, and so they embraced him. Why was this such a surprise? It’s impossible to overstate the alienation between the two Americas, between the global citizens and the global left-behinds, between the great cities that run the nation’s economy and media, and the hinterland that feels not only cheated but, worse, disrespected.

Tsipras goes from one blunder to the next. Still, as long as he’s there, the streets are quiet, amazingly quiet for a society that’s under such economic fire. But he is soon going to be voted out in favor of someone, anyone, who will then see things get much worse in the streets. A smouldering powder keg.

• Tsipras Ready To Give In On Labor Reform To Ensure Debt Relief (Kath.)

Prime Minister Alexis Tsipras is prepared to make further concessions to Greece’s creditors in tough negotiations that are currently under way to ensure that there is no delay in launching crucial talks on relief for the country’s debt burden, Kathimerini understands. According to sources, Tsipras and his key ministers are ready to give in to calls by foreign auditors for more flexibility in the crucial area of labor laws. The government has already agreed to put off its demands for the restoration of collective wage bargaining, a key pledge of leftist SYRIZA before it came to power last year. It is unclear to what degree the Greek side is willing to concede on other issues – such as calls by foreign officials for facilitating mass layoffs for struggling employers and making it harder for unions to call strikes.

A source at the Labor Ministry said over the weekend that the Greek side has submitted its proposals for changes to labor laws and is awaiting the reaction of foreign officials. Tsipras is said to be set on a strategy of withdrawal despite the risks. The key danger is that cohesion in the ranks of leftist SYRIZA, which has already been tested by a series of concessions to foreign creditors, is further compromised, weakening the beleaguered coalition. The other risk is that the further concessions may boost the lead of conservative New Democracy over SYRIZA in opinion polls, which is already significant, thereby enhancing the sense that SYRIZA’s coalition with the right-wing Independent Greeks is on its way out.

Debt Rattle October 24 2016

Oct 242016

October 24, 2016 Posted by Raúl Ilargi Meijer at 9:09 am Finance Tagged with: Assange, deglobalization, exports, Japan, lobbying, swamp, tax perks, Trump, Wikileaks Comments Off

Dorothea Lange Arkansas flood refugee family near Memphis, Texas 1937

• Japan Exports Fall 6.9% YoY, Imports Plunge 16.3% (BBG)

• China: Soon The Most Visible Victim of Deglobalization (AJ)

• China Continues To Buy Up The World (BBG)

• German Momentum Grows for Curbs on Chinese Overseas Investment (BBG)

• Chinese Money Flowing to Hong Kong Stocks Has Suddenly Dried Up (BBG)

• Europe’s Incredibly Safe Banks (BBG)

• Unaffordable Australian Housing ‘in Government Sights’ (BBG)

• What Is “Impossible” And What Is Inevitable (CH Smith)

• Watergate’s Bob Woodward: “Clinton Foundation Is Corrupt, It’s A Scandal” (ZH)

• It’s Time To Drain The Swamp: Five-Point Plan For Ethics Reform (Trump)

• Trump is America: The Poetic Justice Of The World (Dabashi)

• Saudi, Allies ‘Deliberately Targeting Yemen’s Food Industry’, Bomb Cows (Fisk)

• NATO Continues To Prepare For War With Russia (Korzun)

• Juncker To Face No Confidence Vote In EU Parliament (Exp.)

• Wikileaks Status Update on Julian Assange and the US Election (ZH)

WHAT? “Today’s report confirmed that exports are on the rebound,” said Masaki Kuwahara, senior economist at Nomura.”

• Japan Exports Fall 6.9% YoY, Imports Plunge 16.3% (BBG)

Japanese exports fell for a 12th consecutive month in September, rounding out a rough year for manufacturers struggling with a stronger yen and soft global demand. Yet the numbers were better than expected, and export volumes rose last month by the most in nearly two years, prompting some upbeat assessments by economists. “Today’s report confirmed that exports are on the rebound,” said Masaki Kuwahara, senior economist at Nomura. “Manufacturing activities are picking up globally, especially in Asian nations. That bodes well for Japanese exports.” Overseas shipments dropped 6.9% in September from a year earlier, the Ministry of Finance said on Monday. Imports fell 16.3% during the same period, resulting in a trade surplus of 498.3 billion yen ($4.8 billion).

Prime Minister Shinzo Abe has gotten little help from exports recently as he tries to revive Japan’s economy. Net shipments abroad shaved 0.3 percentage point off GDP growth in the second quarter. The yen has gained 16% since the start of the year, and soft global demand has made matters worse. This environment has made companies more reluctant to invest in domestic production, compounding the difficulty of creating economic growth. [..] Exports to the U.S. fell 8.7% from a year earlier. Those to the EU rose 0.7%. Exports to China, Japan’s largest trading partner, dropped 10.6%.

“..trade and investment peaked in 2007-2008. Since then international trade has declined by roughly half a%. Foreign direct investment, or FDI, has fallen by half. That is not half a percent. That is half.”

• China: Soon The Most Visible Victim of Deglobalization (AJ)

Global exports as a percentage of global GDP hit an all-time high of 30.8% in 2008. They fell precipitously during the global financial crisis of 2008-2009 and have since stabilised at just under 30%. These figures cap off a remarkable quarter-century of global export growth that began back in 1973. In that period global GDP roughly doubled, but global export volumes grew by a factor of 5.6 (based on inflation-adjusted data from the World Bank). China played a leading role in that story, but it was the rise in international trade that pulled the Chinese economy along, not the other way around. China rode the coat-tails of a quarter-century of globalisation.

Most people think of globalisation as a process that began in the 1990s with the collapse of the Soviet Union in 1991 and the foundation of the World Trade Organization in 1995. But the roots of today’s global economy really go back to 1973, when the United States went off the gold standard and most countries moved from fixed to floating exchange rates. Floating exchange rates meant that the era of managed trade was over. The global economy moved into a new phase driven by market forces. The oil exporting countries of the Gulf were the first to benefit as the market price for oil quadrupled between 1973 and 1974. China came to the party just a few years later.

Since then the global economy has become more and more open. After the currency liberalisation of 1973 came a huge increase in international trade and then, in the 1990s, in foreign investment. Both trade and investment peaked in 2007-2008. Since then international trade has declined by roughly half a%. Foreign direct investment, or FDI, has fallen by half. That is not half a percent. That is half. Annual global FDI is down roughly 50% from its 2007 peak of just over $3 trillion. It’s still much larger than it was in the 1990s or earlier decades, but global FDI has stabilised at roughly the levels of the early 2000s. Unlike global FDI, foreign investment into China hasn’t fallen in absolute terms. But it too has stabilised and is no longer rising.

The flipside of deglobalization. Monopoly money.

• China Continues To Buy Up The World (BBG)

When a Chinese home-appliance company announced a plan in May to become the largest shareholder in one of Germany’s most advanced robot manufacturers, the backlash was immediate. German politicians and European officials denounced Midea’s offer for Frankfurt-listed Kuka, whose robotic arms assemble Airbus jets and Audi sedans. In a rare public appeal for alternative acquirers, Germany’s economy minister argued that Kuka’s automation technology needed to stay out of Chinese hands. And yet in two months, Midea pulled it off. Thanks to a combination of political courtship, guarantees on jobs and security, and support from influential customers like Daimler CEO Dieter Zetsche, Midea overcame knee-jerk opposition to the deal. By July the appliance maker had secured an 86% stake, valuing Kuka at €4.6 billion.

The experience showed how some Chinese firms are learning to soothe misgivings about the country’s record $207 billion overseas buying spree. While Sinophobia isn’t yet a thing of the past and practices among Chinese buyers vary widely, merger-and-acquisition professionals say a new generation of savvy dealmakers is starting to emerge from the world’s second-largest economy. “Many Chinese companies have become much more adept at navigating international deals in the last few years, and at soothing the concerns stakeholders might have,” said Nicola Mayo, a partner at London law firm Linklaters LLP who specializes in China-Europe transactions. “In many of the larger Chinese companies, you’re dealing with managers who were educated abroad or have worked in international firms. They understand the concerns about China and know they need to move carefully.”

What China’s been buying

And here’s the backlash..

• German Momentum Grows for Curbs on Chinese Overseas Investment (BBG)

Germany is seeking tighter control over foreign investment in European companies, in a sign of a growing protectionist reaction to China’s appetite for overseas acquisitions. Spurred by the purchase of German robot maker Kuka by China’s Midea, Chancellor Angela Merkel’s deputy, Sigmar Gabriel, is calling for EU measures to give national governments expanded powers to block or impose conditions on shareholdings of non-EU companies. He’s found an ally in EU Digital Economy Commissioner Guenther Oettinger, a German who’s a member of Merkel’s party. “It’s absolutely right to initiate this debate at the European level,” Oettinger said in an interview last week. “Everybody has to play by the same rules. Clearly, there are many countries, including big ones such as China, that make market access or corporate takeovers difficult or effectively impossible.”

While Merkel hasn’t publicly backed her vice chancellor’s push, Gabriel’s proposal reflects growing resistance within her government to unfettered Chinese investment in Europe’s biggest economy. In the latest potential Chinese bid, lighting maker Sanan Optoelectronics said it had held talks with Osram Licht on a possible acquisition of the almost century-old German company. The initiative by Gabriel, who also is Germany’s economy minister, calls for allowing EU member states to step in if a non-EU investor seeks to acquire more than 25% of the voting rights in a company [..] Chinese companies have announced or completed acquisitions of German companies worth a record $12.3 billion this year, almost eight times the level of 2015. That includes the purchase of Kuka by Midea, China’s biggest appliance maker, after Gabriel led a failed effort to find an alternative bid by a European suitor.

“Investors in Shanghai spent more than $8 billion on Hong Kong shares in September [..] Net buying this month through last week was just 7% of that amount..”

• Chinese Money Flowing to Hong Kong Stocks Has Suddenly Dried Up (BBG)

Hong Kong’s stock market is suffering from a post-holiday hangover. The flood of Chinese money into the city before the mainland’s National Day celebrations in early October has slowed to a trickle since traders returned from the week-long break. Investors in Shanghai spent more than $8 billion on Hong Kong shares in September, the biggest monthly inflow via the exchange link since it began in 2014. Net buying this month through last week was just 7% of that amount, data compiled by Bloomberg show. The narrowing valuation discount on the city’s dual-listed shares and concern about the Federal Reserve’s impending rate increase may have spurred mainland investors to turn off the taps, according to Hong Kong analysts, who also say they’re perplexed at the speed of the shift.

The change is a headwind for equities after the influx of Chinese money helped drive the Hang Seng Index up 12% last quarter for its best such gain in seven years. “It’s a bit of a mystery as to why this is happening,” said Mohammed Apabhai, head of Asia trading strategy at Citigroup. “Nobody has put forward a convincing explanation about exactly why the southbound flow has dried up and whether it’s a temporary phenomenon. That has removed one of the supports from the Hong Kong equity market.” China International Capital cut its rating on Hong Kong-listed mainland banks last week, citing the dwindling inflows. Trades from Shanghai made up as much as 17% of the total turnover in Hong Kong at one point last month, the highest on record. That ratio dropped to less than 7% on Oct. 20.

I have an ominous feeling about this.

• Europe’s Incredibly Safe Banks (BBG)

Given the parlous state of Europe’s economy, it’s hard to imagine that the investments of the region’s banks are among the safest in the world. Yet that is precisely what they would have regulators and investors believe. The banks’ safety has come into the spotlight as European officials – including German Finance Minister Wolfgang Schaeuble and European Commission financial-services chief Valdis Dombrovskis – battle with global regulators over requirements for capital, the layer of loss-absorbing financing that prevents bad investments from turning into system-wide disasters. The dispute involves risk-weighting, a process in which the largest and most sophisticated banks assess the riskiness of their assets to figure out how much capital they need.

A loan to a struggling company might require a lot, safe government bonds none at all. Less capital means more leverage, which in good times boosts measures of profitability such as return on equity. Hence, banks have an incentive to make their assets look as safe as possible. Europe’s banks have excelled in this minimizing endeavor. On average for eight of the euro area’s most systemically important institutions, risk-weighted assets amounted to just 31% of total unweighted assets at the end of June – as if about seven out of every 10 euros in investments were risk-free. For Germany’s Deutsche Bank, among the world’s most thinly capitalized, the ratio was just 22%. That compares with averages of 35% and 45% for the largest U.K. and U.S. banks, respectively. Here’s how that looks:

To be sure, lower risk weights could mean that Europe’s banks actually do have safer assets. There’s plenty of evidence, though, to suggest this isn’t the case. The IMF estimates that banks in the euro area are sitting on more than $1 trillion in bad loans. Also, markets place a much lower value on each euro of European banks’ book assets than they do on each dollar of U.S. banks’.

This from a government that relies on soaring housing prices to make its economy appear viable. Australia’s problem is not the extravagant tax perks, or ultra low rates, or Chinese monopoly money pouring in. No, all that’s fine, and all that needs to be done is build build build.

• Unaffordable Australian Housing ‘in Government Sights’ (BBG)

Australian states need to remove or simplify residential land planning regulations that have made homes “increasingly unaffordable” in the nation’s biggest cities, Treasurer Scott Morrison said. Insufficient land releases and complex development regulations must be addressed, Morrison said in the text of a speech being given in Sydney Monday. He’ll use a December meeting with his state counterparts to urge a freeing up of housing supply, an issue which will be a key focus of Prime Minister Malcolm Turnbull’s government, he said. “Of all the determinants of house prices in Australia, whether cyclical or structural, the most important factor behind rising prices has been the long running impediments to the supply side of the market,” Morrison said.

While a three-year surge in Australian home prices paused at the end of last year after banks raised mortgage rates, the market has taken off again as a growing population tries to squeeze into too few properties. Dwelling values in Sydney, which have almost doubled since the end of 2008, are up 14% this year through September, compared with a 9% gain across the nation’s other major cities, according to CoreLogic. The recent rise defies an assessment by real-estate listing firm Domain last year that the boom was over, and is posing a potential headache for new central bank Governor Philip Lowe, who said this month that that fewer properties were changing hands and “some markets have strengthened recently.” Housing in Australia’s three biggest cities – Sydney, Melbourne and Brisbane – “is expensive and increasingly unaffordable,” Morrison said.

Other factors contributing to supply-side constraints are the cost and availability of infrastructure, transaction taxes and negative public attitudes toward urban development, he said. Still, Morrison is again ruling out his government stripping back some of the tax perks for landlords and property investors, known as negative gearing, which the Labor opposition blames for inflating house prices. “The key to addressing housing affordability is not to crash the housing market,” Morrison said. “Rather the objective is to have policies that mitigate the artificial inflation of asset prices, ensure that supply is not restricted from responding to genuine demand and that enable home-buyers, through their own efforts, to make more rapid progress to being able to enter the market.’’

“..the S-curve of “growth” can continue expanding even as the foundation weakens. As the foundations of real growth weaken – productivity, collateral, social mobility, etc. – the system becomes increasingly fragile and brittle.”

• What Is “Impossible” And What Is Inevitable (CH Smith)

We are about to start a painful learning process about what is “impossible” and what is inevitable. Two charts illustrate Why Our Status Quo Failed and Is Beyond Reform: this chart of the S-Curve of financialization, leverage, debt, central planning, regulatory capture and globalization – that is, the engines of modern “growth” – depicts the inevitable stagnation and decline of these dynamics as overcapacity, debt saturation and diminishing returns take hold. This chart illustrates the status quo’s insistence on doing more of what has failed spectacularly: since all this worked in the boost phase, the central planning Cargo Cult’s “leadership” is convinced it will all work magically again, if only we do more of it. Alas, this is magical thinking. One might as well paint radio dials on rocks and expect the rock to magically turn into a functioning radio.

The chart of the Seneca Cliff illustrates how the S-curve of “growth” can continue expanding even as the foundation weakens. As the foundations of real growth weaken – productivity, collateral, social mobility, etc. – the system become increasingly fragile and brittle. But this fragility is masked by the appearance of stability until a crisis cracks it wide open. Normalcy crumbles into instability, and people and systems accustomed to stable supply chains and political stability struggle to maintain their grip on income streams and resources as abundance slips into scarcity and dependence on central planning becomes a liability of learned helplessness.

The S-curve:

The Seneca Cliff:

There are two sets of solutions as stability and financialized “growth” slide into instability and DeGrowth. 1. Acquire skills that will be increasingly scarce and a network of collaborators, customers and suppliers who value/make use of these skills. 2. Create a new mode of production that doesn’t rely on central banks, states and global finance to function: in effect, a decentralized, localized networked system that exists in parallel with the centralized hierarchies of the current mode of production which is centralized, industrialized, globalized, financialized, neofeudal, neoliberal, neocolonial, and dependent on ever-expanding leverage, debt, central planning, regulatory capture and fossil fuel consumption.

Here’s the theme I wrote about in yesterday’s “Ungovernability”: “I think the issue is, what’s going to be the aftermath of this campaign. Can somebody govern…?”

• Watergate’s Bob Woodward: “Clinton Foundation Is Corrupt, It’s A Scandal” (ZH)

CHRIS WALLACE, FOX NEWS SUNDAY: Then there are the allegations about the Clinton Foundation and pay to play, which I asked Secretary Clinton about in the debate, and she turned into an attack on the Trump Foundation. But, Bob, I want to go back to the conversation I was having with Robby Mook before. When – when you see what seems to be clear evidence that Clinton Foundation donors were being treated differently than non-donors in terms of access, when you see this new – new revelations about the $12 million deal between Hillary Clinton, the foundation, and the king of Morocco, are voters right to be troubled by this?

BOB WOODWARD, THE WASHINGTON POST: I – yes, it’s a – it’s corrupt. It’s – it’s a scandal. And she didn’t answer your question at all. And she turned to embrace the good work that the Clinton Foundation has done. And she has a case there. But the mixing of speech fees, the Clinton Foundation, and actions by the State Department, which she ran, are all intertwined and it’s corrupt. You know, I mean, you can’t just say it’s unsavory. But there’s no formal investigation going on now, and there are outs that they have. But the election isn’t going to be decided on that. I mean Karl was making the point about this, I’m not going to observe the result of the election. I mean that’s – that’s absurd. I mean it has no consequence. If Trump loses, they’re not going to let him in the White House. He’s not going to have a transition team. And – and to focus on that, I think, is wrong. I think the issue is, what’s going to be the aftermath of this campaign. Can somebody govern…?

Call him as crazy as you wish, but he does make a lot of sense here.

• It’s Time To Drain The Swamp: Five-Point Plan For Ethics Reform (Trump)

I’m proposing a package of ethics reforms to make our government honest once again.

First: I am going to re-institute a 5-year ban on all executive branch officials lobbying the government for 5 years after they leave government service. I am going to ask Congress to pass this ban into law so that it cannot be lifted by executive order.

Second: I am going to ask Congress to institute its own 5-year ban on lobbying by former members of Congress and their staffs.

Third: I am going to expand the definition of lobbyist so we close all the loopholes that former government officials use by labeling themselves consultants and advisors when we all know they are lobbyists.

Fourth: I am going to issue a lifetime ban against senior executive branch officials lobbying on behalf of a foreign government.

Fifth: I am going to ask Congress to pass a campaign finance reform that prevents registered foreign lobbyists from raising money in American elections.

Prof. Dabashi revels in comparing Trump to Hitler, a weird thing to do for any intellectual, and absolute nonsense. But he’s right in many other aspects.

• Trump is America: The Poetic Justice Of The World (Dabashi)

Hours before the scheduled third and final debate between Donald Trump and Hillary Clinton in Las Vegas, The New York Times published an article in which it argued that the Republican presidential nominee in effect has no foreign policy beyond using and abusing global issues to elicit gut fears and hostile fantasies of his domestic followers, that foreign policy has in effect become a matter of domestic fear-mongering. The piece could not have been more timely and poignant – but not in the sense that The New York Times intended it further to discredit the liberal bete noire of this election. In a sense far more serious and accurate. For the World at large, Trump is America and America is Trump. What has now become domestic politics to the US has been its foreign policy for a much longer history.

There are decent Americans who insist Trump is “the worst of America”. But for the world at large and at the receiving end of American military might, Trump is the very quintessence of America because Trump is what America does to the world, and now it has come dangerously close to do unto itself what it has habitually done unto others. Liberal America is now scared that Trump will do to America what America has done to the world. It was just “foreign policy” when America set up lunatic puppet dictators just like Trump to torture, maim, and murder their own people around the globe to protect its “national security interest”. It was just something “Daddy” did at work. When he came home he was all good, kind, and cuddly – just like Obama.

Now the Daddy is about to become a nasty, vicious, domestic abuser – like Trump. Trump is the poetic justice of the world. So long as America was only doing to the world at large what America now fears Trump may do to America, there was no outcry. There was consensus. The world deserved what America did to the world. Now liberal America is up in arms to disown, to exorcise, to dispel this demonic spirit from itself and put it back in a bottle and hand it over to Hillary Clinton so she can continue the habitual exercise of doing it to the world and be a nice, lovely-looking grandma at home, as Ronald Reagan was its grandpa before her.

Hamid Dabashi is the Hagop Kevorkian Professor of Iranian Studies and Comparative Literature at Columbia University.

“..the Saudis have included in their bombing targets cows..”

• Saudi, Allies ‘Deliberately Targeting Yemen’s Food Industry’, Bomb Cows (Fisk)

The Yemen war uniquely combines tragedy, hypocrisy and farce. First come the casualties: around 10,000, almost 4,000 of them civilians. Then come those anonymous British and American advisers who seem quite content to go on “helping” the Saudi onslaughts on funerals, markets and other obviously (to the Brits, I suppose) military targets. Then come the Saudi costs: more than $250m (£200m) a month, according to Standard Chartered Bank – and this for a country that cannot pay its debts to construction companies. But now comes the dark comedy bit: the Saudis have included in their bombing targets cows, farms and sorghum – which can be used for bread or animal fodder – as well as numerous agricultural facilities.

In fact, there is substantial evidence emerging that the Saudis and their “coalition” allies – and, I suppose, those horrid British “advisers” – are deliberately targeting Yemen’s tiny agricultural sector in a campaign which, if successful, would lead a post-war Yemeni nation not just into starvation but total reliance on food imports for survival. Much of this would no doubt come from the Gulf states which are currently bombing the poor country to bits. The fact that Yemen has long been part of Saudi Arabia’s proxy war against Shiites and especially Iran – which has been accused, without evidence, of furnishing weapons to the Shia Houthi in Yemen – is now meekly accepted as part of the Middle East’s current sectarian “narrative” (like the “good” rebels in eastern Aleppo and the “very bad” rebels in Mosul). So, alas, have the outrageous bombings of civilians. But agricultural targets are something altogether different.

A NATO Schengen zone means foreign soldiers can move into any country the command wishes. If that’s not a recipe for disaster, I don’t know what is. Imagine deplying Turkish troops in Greece, or Polish in Britain, French in Germany.

• NATO Continues To Prepare For War With Russia (Korzun)

NATO uses any pretext to accuse Russia of harboring aggressive intentions. It has raised ballyhoo over the recent deployment of Iskander short-range surface-to-surface ballistic missiles to the Kaliningrad region. Time and time again, the alliance reaffirms its bogus Russia narrative. “We see more assertive and stronger Russia that is willing to use force,” concluded NATO General Secretary Jens Stoltenberg speaking at the round table in Passau, Bavaria on October 10. At the same time, NATO is pushing ahead with its military “Schengen zone” in Europe. “We are working to ensure that each individual soldier will not require a decision at the political level to cross the border,” said Estonian Defense Minister Hannes Hanso.

The idea is to do away with travel restrictions on the movement of NATO forces troops and equipment across Europe. There will be no need to ask for permissions to move forces across national borders. It will undermine the sovereignty of member states but facilitate the cross-continent operations instead. The Baltic States and Poland are especially active in promoting the plan. The restrictions in place hinder rapid movement of the 5,000 strong “Very High Readiness Joint Task Force”. Besides being the first response tool, it could be used for preventing Article 4 situations, such as subterfuge, civil unrest or border infractions, from escalating into armed conflict. The troops can move freely in time of war, but introducing a NATO Schengen zone is needed for concentrating forces in forward areas in preparation for an attack across the Russian border.

The formation of the much larger 40 thousand strong NATO Response Force (NRF) is on the way. Meanwhile, the US and Norwegian militaries are discussing the possibility of deploying US troops in Norway – a country which has a 200 km long common border with Russia. The deployment of US servicemen would be part of a rotating arrangement in the country that would fulfil a “long-standing US wish.” Norwegian newspaper Adresseavisen reported on October 10 that 300 combat US Marines could soon be in place at the Værnes military base near Trondheim, about 1,000 kilometres from the Russian-Norwegian frontier. The air station also serves as part of Marine Corps Prepositioning Program-Norway, a program that allows the Corps to store thousands of vehicles and other major pieces of equipment in temperature-controlled caves ready for combat contingency.

Several defence sources told the newspaper that the plans to put US troops at the military base have been underway for some time. According to Military.com, the information that the plans are underway was also confirmed by American Maj. Gen. Niel E. Nelson, the commander of Marine Corps Forces Europe and Africa. 300 Marines can be easily reinforced. The only purpose for the deployment is preparation for an attack against Russia. After all, the Marines Corps is the first strike force. And it’s not Russian Marines being deployed near US national borders, but US Marines deployed in the proximity of Russian borders. The provocative move is taking place at the time the Russia-NATO relationship is at the lowest ebb.

Not sure how serious to take this, but it’s plenty entertaining. Just look at the woman who’s after Juncker. She’s would scare me too. Already does.

• Juncker To Face No Confidence Vote In EU Parliament (Exp.)

Lifelong anti-corruption campaigner Eva Joly has launched a bid to boot out the controversial EU president in yet another blow to his crumbling authority. The French magistrate and politician, who was born in Norway, blasted the eurocrat’s past as president of Luxembourg and vowed to lead an MEPs’ rebellion to “make him fall”. Ms Joly has accused Brussels’ top unelected official of favouring certain multinational corporations for “sweetheart” tax deals when he was head of the tiny European state. Mr Juncker has denied being corrupt, claiming that any decisions related to the tax arrangements of large companies during his time in office were “strictly a matter for the tax administration”. But the damaging row has seriously dented his already battered reputation and has added to the growing calls from across the continent for him to quit.

And Ms Joly, from the Green party, said the escalating scandal could finally finish off the “considerably weakened” Teflon bureaucrat. She said: “Everyone knows that this system was built while he was prime minister. It is a scandal that he leads the Commission. We, the Greens, we do not want it. “At the first opportunity, I will bring a motion [before the the European Parliament] to make him fall.” Such a vote would severely test MEPs’ loyalty towards the Brussels chief at a time when he has become the face and symbol of all Europe’s ills. Mr Juncker is seen as the centrepiece of a federalist European dream which has driven Britain to the exit door and angered many eastern European states, who are already calling for him to quit. He has also apparently lost the support of German leader Angela Merkel over Brussels’ farcical handling of the migrant crisis, making his position at the heart of the Brussels machine ever more tenuous.

“Concerned speculation about the Ecuadorian embassy exile had risen to such an degree, that overnight Wikileaks announced it would provide a state update on Assange’s current status.”

• Wikileaks Status Update on Julian Assange and the US Election (ZH)

On Tuesday, the government of Ecuador issued a statement saying that it had decided to not permit Mr. Assange to use the government of Ecuador’s internet connection during the US election citing its policy of “non interference.” Ecuador’s statement also clarified that it does not seek to interfere with WikiLeaks journalistic work and that it would continue to protect Mr. Assange’s asylum rights. Mr. Assange has asylum at the Ecuadorian embassy in London, where the United Nations has ruled he has been unlawfully deprived of liberty by the United Kingdom and the Kingdom of Sweden for the last six years. He has not been charged. It is the government of Ecuador’s prerogative to decide how to best guard against the misinterpretation of its policies by media groups or states whilst ensuring that it protects Mr. Assange’s human rights.

WikiLeaks is a global, high volume publisher that publishes on average one million documents and associated analyses a year. WikiLeaks publishes its journalistic work from large data centers based in France, Germany, the Netherlands and Norway, among others. Most WikiLeaks staff and lawyers reside in the EU or the US and have not been disrupted. WikiLeaks has never published from jurisdiction of Ecuador and has no plans to do so. Similarly Mr. Assange does not transmit US election related documents from the embassy. WikiLeaks is entirely funded by its readers, book and film sales. Its publications are the result of its significant investigative and technological capacities. WikiLeaks has a perfect, decade long record for publishing only true documents. It has many thousands of sources but does not engage in collaborations with states. Mr. Assange has not endorsed any candidate although he was happy to speak at the Green’s convention due to Dr. Jill Stein’s position [on] whistleblowers, peace and war.

Debt Rattle August 23 2016

Aug 232016

August 23, 2016 Posted by Raúl Ilargi Meijer at 9:04 am Finance Tagged with: China, debt, Deutsche, FBI, Fed, Greece, Hillary, Japan, QE, refugees, shadow Comments Off

DPC ‘On the beach, Palm Beach’ 1905

• Emerging Market Debt Up 24% In 2015 To $18 Trillion (VW)

• China Caught In ‘Dead Money’ Trap; PBOC Pleads For Fiscal Stimulus (AEP)

• China’s Best-Performing Bank A ‘Mirage’ Of Shadow Lending (BBG)

• More Than 1.5 Million UK Households In Extreme Debt (G.)

• Monetary Policy Has Nationalized The Japan Stock Market (CNBC)

• Bank of Japan’s Rush Into Stocks Raises Fears Of Market Distortions (R.)

• Fed Admits $4 Trillion More In QE Needed In Case Of “Economic Shock” (ZH)

• Deutsche Bank’s $10-Billion Scandal (New Yorker)

• Goldman Says It’s Too Late to Chase the Booming Real Estate Sector (BBG)

• Congressman Seeks to “Stop Madness” of US Support for Saudi War in Yemen (IC)

• Hillary Emails Recovered By FBI To Be Released Just Before Election Day (G.)

• Chaffetz: FBI’s Notes From Clinton Interview Keep Changing (WE)

• Foundation Ties Bedevil Hillary Clinton’s Presidential Campaign (NYT)

• US Banks Want To Cut Branches, But Customers Keep Coming (R.)

• Dark Dynamics (Jim Kunstler)

• From The Destruction Of Greece To Democracy In Europe (Galbraith)

• Coast Guard Fired at Migrant Boats, European Border Agency Documents Show (IC)

• Greece Plans New Refugee Centers As New Arrivals Soar (Kath.)

“Unsurprisingly, China was responsible for almost all of the growth in debt last year.”

• Emerging Market Debt Up 24% In 2015 To $18 Trillion (VW)

Alongside gold and developed market Sovereign bonds, developed market equities and bonds have been some of the hottest trades this year. According to Bank of America’s “Flow Show” report published at the end of last week, around $2 billion flowed into emerging market debt funds over the last week. This marks the seventh straight week of inflows into such funds. Over this period, more than $20 billion has been invested in emerging market bond funds, the largest amount on record. Meanwhile and $5 billion found its way into emerging market stock funds last week, taking the seven-week total to $14.6 billion for emerging market equity funds, a near two-year high.

Emerging market debt funds have become a hot commodity this year as the yields on developed market bonds plunge to levels that offer little in the way of return. Bond funds have attracted $138 billion so far this year. On the other hand, equity funds have seen outflows of $128 billion since the start of 2016 (all of these outflows come from mutual funds, low-cost equity ETF have attracted $52.5 billion of assets so far this year). It seems that emerging markets are only too happy to generate more debt to meet the increasing demand for investors. According to research from Bank of America’s quantitative fixed income strategist Jane Brauer, last year the total value of global emerging market outstanding debt rose to $18.2 trillion, up around $2 trillion year-on-year.

In local currency terms this gain is 24% but in US dollar terms, thanks to dollar depreciation, the rise in debt looks much more subdued at only 12%. For 2014 the total value of global emerging market outstanding debt grew by 12% year-on-year and on average the emerging market debt stock has increased by approximately 14% per annum since the year 2000. Unsurprisingly, China was responsible for almost all of the growth in debt last year. China total debt rose by $2 trillion during 2015. China domestic debt skyrocketed by 30% in 2015 in US dollar terms, with the government and financial institutions local debt components both increasing 36%.

The more central banks print, the more trust evaporates.

• China Caught In ‘Dead Money’ Trap; PBOC Pleads For Fiscal Stimulus (AEP)

China is at mounting risk of a Japanese-style “liquidity trap” as monetary policy loses traction and the economy approaches credit exhaustion, forcing a shift towards Keynesian fiscal stimulus. Officials at the PBOC have begun to call for a fundamental change in strategy, warning that interest rate cuts have become an increasingly blunt tool. They cannot easily stop companies hoarding cash or halt the slide in private investment. Sheng Songcheng, the PBOC’s head of analysis, set off a storm last month by warning that the economy had “started to show some signs of being caught in a liquidity trap”. He has since stepped up his pleas for action by the fiscal authorities to relieve the burden on the central bank, a Chinese variant of the parallel drama that is being played out in Europe and Japan.

Mr Sheng told China Business News on Monday that the country has a very low reliance on foreign borrowing and can easily afford to shore up the economy with a Keynesian boost. “China can let its deficit-to-GDP ratio rise to over 3pc or even 5pc in the long run. It can spur growth more effectively by lowering corporate taxes than by cutting the interest rate,” he said. The powerful State Council has now joined the chorus with calls this week for a $75bn cut in business taxes to boost confidence and channel stimulus to the productive economy. Caixin magazine said Chinese companies are hoarding record sums of “dead money” rather than spending it. The growth rate of private investment has dropped to 2.1pc over the last seven months, the lowest since the global financial crisis. The central bank is effectively ‘pushing on a string’, an expression coined by John Maynard Keynes in the 1930s.

But most of the shadow loans are not inside the banks.

• China’s Best-Performing Bank A ‘Mirage’ Of Shadow Lending (BBG)

The best-performing bank in China is in a struggling city in the northeast where weeds sprout alongside the concrete skeletons of high rises in an industrial zone that mostly looks like a ghost town. Steel plants have laid off tens of thousands of workers. Cranes stand idle on construction sites. Wipe away a spiderweb on a dirty glass door at an empty complex with smashed windows and there’s a notice from the local government demanding rent unpaid since November 2014. Yet the Bank of Tangshan’s financial statements hardly reflect these realities. Instead, this small lender reports the fastest growth of 156 Chinese financial institutions and the lowest level of bad loans, a mere 0.06%. Its profit jumped 436% in two years and assets soared almost 400% since the start of 2014 to 177.9 billion yuan ($26.7 billion).

It’s largely driven by shadow lending. The bank is the most prominent example of the off-loan-book wizardry that’s turbo-charging some of China’s small and mid-sized banks, creating opaque risks that could lead to failures, bailouts or liquidity shocks that jolt the nation and global markets in the years ahead. “It’s a mirage built upon risks,” said He Xuanlai, of Commerzbank. The Singapore-based analyst cited smaller banks’ use of so-called “investment receivables” — including asset management plans and wealth management products — to boost lending without facing requirements to bolster capital and loan-loss provisions. “It’s hard to assess the banks’ true asset quality.”

This form of shadow lending is so widespread that a survey of 26 banks by Moody’s Investors Service found that they’d quadrupled use of the products since 2012, with small and mid-sized lenders contributing an outsize share. The IMF estimates that Chinese banks held $2.3 trillion of shadow credit products at the end of last year, adding to a build-up that could pose “substantial risks” to the financial system. Some little-known Chinese banks have already been quietly bailed out, UBS said.

What caused Brexit.

• More Than 1.5 Million UK Households In Extreme Debt (G.)

About 1.6m UK households are living in extreme debt, according to a report by the TUC, which says official figures underestimate the intense burden of repayment on many families and individuals. Contrary to official data, which suggests that households have been repaying debt accumulated before the financial crisis, the Britain in the Red report says households are finding it harder than ever to cope as wages have fallen. “More than 1m families with a household income below £30,000 are in extreme debt and ongoing wage stagnation is making the problem worse,” the report says. Total unsecured debt, including car loans and credit cards, but excluding mortgages, for UK households rose by £48bn between 2012 and 2015 to £353bn.

As wages declined, the real burden of repaying debt became tougher. The TUC said 3.2m households are in problem debt, defined as spending more than 25% of total household income on unsecured debt repayments. About 1.6m households are in extreme debt, paying out 40% or more of household income to creditors. The problem is growing fastest among the working poor, people with jobs but insufficient pay to stay financially afloat. OECD figures show that UK real wages fell by 10.4% between 2007 and 2015, making the task of keeping up debt repayments harder. In 2015, 9% of low-income households with an adult in employment were in extreme problem debt, almost double the figure of 5% in 2014, the report found.

One day you’ll find out how insane this is.

• Monetary Policy Has Nationalized The Japan Stock Market (CNBC)

Even a resurgent yen hasn’t dampened Japan’s stock rally over the past couple months, but that’s not necessarily because investors like the market. The Nikkei 225 index has surged around 10% since late June, even as the yen has climbed against the dollar, with the pair testing levels under 100. Normally this would be bad news for stocks as a stronger yen is a negative for exporters as it reduces their overseas profits when converted to local currency. So what explains the buoyant stock market? Analysts attributed the gains to the Bank of Japan (BOJ), not fundamentals.

In a report titled, “BOJ nationalizing the stock market,” Nicholas Smith, an analyst at CLSA, said that the central bank’s exchange-traded fund (ETF) buying program was distorting the market. At its late July meeting, the BOJ said it would increase its ETF purchases so that their amount outstanding will rise at an annual pace of 6 trillion yen ($56.7 billion), from 3.3 trillion yen previously. Those purchases were particularly distorting to the market because they focused largely on funds tracking the Nikkei 225 index, Smith said in a note dated Sunday, estimating that more than half of the BOJ’s ETF buying was likely in Nikkei-tied funds.

Kuroda and Abe are destroying their own markets by destroying price discovery.

• Bank of Japan’s Rush Into Stocks Raises Fears Of Market Distortions (R.)

The Bank of Japan’s near doubling of its purchases of Tokyo shares is causing investors to worry the central bank will dominate financial markets, which could lead to price distortions as it continues to grease the economy. The BOJ’s buying spree will make it harder for investors to sift good companies from bad, and raises a host of other problems including misallocating capital, making equities trading more speculative and reducing incentives for companies to meet shareholder needs, analysts say. More than three years of massive monetary stimulus has already resulted in the central bank cornering the Japanese government bond (JGB) market and distorting interest rates. “The increased BOJ purchasing provides a very favorable demand environment for listed equities,” said Michael Kretschmer, CIO at Pelargos Capital in the Hague.

“Nevertheless, in the long run we strongly doubt these type of monetary gimmicks aimed at price setting of risk assets can have a sustained positive impact on economic growth.” The BOJ doesn’t dominate the stock market as it does JGBs, but its revved up buying of index-based shares has shifted attention to the central bank’s behavior and away from how companies perform. [..] Some liken the increased purchases by the BOJ – the only central bank in the world that buys stocks at the moment – to failed government efforts over more than two decades to prop up the market by pressing government-related financial institutions to buy after the bursting of the late-1980s asset bubble.

[..] With foreign investors largely staying away, disappointed at the lack of progress in Japan’s structural reforms, the BOJ is almost sure to be the biggest buyer on the Tokyo Stock Exchange for the foreseeable future. “The market is driven completely by the BOJ’s buying rather than views on each companies’ earnings,” said a fund manager at a Japanese asset management firm.

“..the Fed is already factoring in a scenario in which a shock to the economy leads to additional QE of either $2 trillion, or in a worst case scenario, $4 trillion..”

• Fed Admits $4 Trillion More In QE Needed In Case Of “Economic Shock” (ZH)

In a Fed Staff working paper released over the weekend titled “Gauging the Ability of the FOMC to Respond to Future Recessions” and penned by deputy director of the division of research and statistics at the Fed, the author concludes that “simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances.” So far so good, however, there are some notable problems with the paper’s assumptions, as Citi head of G10 FX, Steven Englander, observes.

He writes that the paper’s basic framework is to take the standard US economic model used by the Fed, give it a negative shock big enough to push the unemployment rate up by 5%age points (big but not unprecedented over the last 50 years) and deploying the Fed’s policy rate, QE and forward guidance tools to see if they are adequate to get the economy back on track. Negative rates and helicopter money are not used. The two simulations assume: 1) the economy is in equilibrium initially with inflation at 2%, r* at 1%, so equilibrium nominal fed funds is 3%; 2) the economy is in equilibrium initially with inflation at 2%, r* at zero (secular stagnation) and equilibrium nominal fed funds at 2%.

He compares three policy approaches. The first assumes a linear world where fed funds can go into negative territory but there is no breakdown in the structure of economic relationships. It is probably not a realistic view of policy ineffectiveness at negative rates, but it is mean to be a baseline. The second just takes fed funds down to zero and keeps it there long enough for unemployment to return to baseline. “The third takes fed funds down to zero and augments it with additional $ 2trn of QE and forward guidance. A variation on the third policy response function doubles the amount of QE in the second simulation.” In other words, the Fed is already factoring in a scenario in which a shock to the economy leads to additional QE of either $2 trillion, or in a worst case scenario, $4 trillion, effectively doubling the current size of the Fed’s balance sheet.

Mirror trades designed to get capital out of Russia. Nice piece.

• Deutsche Bank’s $10-Billion Scandal (New Yorker)

Deutsche Bank is an unwieldy institution with headquarters in Frankfurt and about a hundred thousand employees in seventy countries. When it was founded, in 1870, its stated purpose was to facilitate trade between Germany and other countries. It soon established footholds in Shanghai, London, and Buenos Aires. In 1881, the bank arrived in Russia, financing railways commissioned by Alexander III. It has operated there ever since. During the Nazi era, Deutsche Bank sullied its reputation by financing Hitler’s regime and purchasing stolen Jewish gold. After the war, the bank concentrated on its domestic market, playing a significant role in Germany’s so-called economic miracle, in which the country regained its position as the most potent state in Europe.

After the deregulation of the U.S. and U.K. financial markets, in the nineteen-eighties, Deutsche Bank refreshed its overseas ambitions, acquiring prominent investment banks: the London firm Morgan Grenfell, in 1989, and the American firm Bankers Trust, in 1998. By the new millennium, Deutsche Bank had become one of the world’s ten largest banks. In October, 2001, it débuted on the New York Stock Exchange. Although the bank’s headquarters remained in Germany, power migrated from conservative Frankfurt to London, the investment-banking hub where the most lavish profits were generated. The assimilation of different banking cultures was not always successful. In the nineties, when hundreds of Americans went to work for Deutsche Bank in London, German managers had to place a sign in the entrance hall spelling out “Deutsche” phonetically, because many Americans called their employer “Douche Bank.”

In 2007, the bank’s share price hit an all-time peak: a hundred and fifty-nine dollars. But as it grew fast it also grew loose. Before the housing market collapsed in the United States, in 2008, sparking a global financial crisis, Deutsche Bank created about thirty-two billion dollars’ worth of collateralized debt obligations, which helped to inflate the housing bubble. In 2010, Deutsche Bank’s own staff accused it of having masked twelve billion dollars’ worth of losses. Eric Ben-Artzi, a former risk analyst, was one of three whistle-blowers. He told the SEC that, had the bank’s true financial health been known in 2008, it might have folded, as Lehman Brothers had. Last year, Deutsche Bank paid the SEC a $55 million fine but admitted no wrongdoing. Ben-Artzi told me that bank executives had incurred a tiny penalty for a huge crime. “There was cultural criminality,” he said. “Deutsche Bank was structurally designed by management to allow corrupt individuals to commit fraud.”

When has that ever stopped the greater fool?

• Goldman Says It’s Too Late to Chase the Booming Real Estate Sector (BBG)

Real estate stocks were a buying opportunity a few years ago, but at this point Goldman Sachs says the area is too risky for investors. At the end of this month, Real Estate will separate from Financials to become its own sector in the S&P 500. While those stocks have outpaced the S&P 500 so far in 2016, analysts led by David Kostin at Goldman Sachs say there are a lot of challenges, and they are not recommending investors try to make up for the missed gains. “Real Estate has outpaced the S&P 500 by 156 basis points year-to-date, which has hurt large-cap mutual fund returns given their underweight allocation to the sector,” Kostin and company write.

One thing that could help the new sector, however, is that even if those fund managers just move from underweight to neutral, there could be a big inflow of funds. According to Goldman, close to half of large-cap core funds managers have zero exposure to the sector. The analysts forecast as much as $19 billion in new demand, as funds that aren’t currently in real estate try to play catch up. That may be good enough not to slap a sell rating on these stocks, but it isn’t enough to give them a buy rating. “Looking forward, we recommend a Neutral weighting to the Real Estate sector given slowing top-line revenue growth, average relative valuation, and risks from a higher interest rate environment,” they conclude.

“I taught the law of war when I was on active duty [..] You can’t kill children, newlyweds, doctors and patients – those are exempt targets under the law of war..”

• Congressman Seeks to “Stop Madness” of US Support for Saudi War in Yemen (IC)

For months, a California congressman has been trying to get Obama administration officials to reconsider U.S. backing for the Saudi-led war in Yemen. And for months, he has been given the runaround. Ted Lieu, a Democrat representing Los Angeles County, served in the Air Force and is a colonel in the Air Force Reserves. The brutal bombing of civilian areas with U.S.-supplied planes and weapons has led him to act when most of his colleagues have stayed silent. “I taught the law of war when I was on active duty,” he told The Intercept. “You can’t kill children, newlyweds, doctors and patients – those are exempt targets under the law of war, and the coalition has been repeatedly striking civilians,” he said. “So it is very disturbing to me. It is even worse that the U.S. is aiding this coalition.”

But he and a very few other lawmakers who have tried to take bipartisan action to stop U.S. support for the campaign are a lonely bunch. “Many in Congress have been hesitant to criticize the Saudis’ operational conduct in Yemen,” Lieu said. He didn’t say more about that. The matter has gotten ever more urgent since August 7, when the Saudi-led coalition relaunched an aggressive campaign of attacks after Houthi rebels in Yemen rejected a one-sided peace deal. More than 60 Yemeni civilians have been killed in at least five attacks on civilian areas since the new bombing campaign began. On August 13, the coalition bombed a school in Haydan, Yemen, killing at least 10 children and injuring 28 more.

Lieu released a statement two days later, harshly condemning the attack. “The indiscriminate civilian killings by Saudi Arabia look like war crimes to me. In this case, children as young as 8 were killed by Saudi Arabian air strikes,” he wrote. “By assisting Saudi Arabia, the United States is aiding and abetting what appears to be war crimes in Yemen,” Lieu added. “The administration must stop enabling this madness now.” Then, mere minutes after his office sent out the statement about the August 13 attack, another tragedy started making headlines: The coalition had just bombed a hospital operated by the international medical humanitarian group Doctors Without Borders (MSF), killing 19.

Something tells me this is not a done deal.

• Hillary Emails Recovered By FBI To Be Released Just Before Election Day (G.)

Nearly 15,000 emails recovered by the FBI from the private server used by Hillary Clinton when she was secretary of state are set to be made public just before the presidential election in November, it emerged in court on Monday. The state department said it was reviewing 14,900 documents that came to light in the now-closed investigation into the handling of sensitive information that flowed through the server in question. That is a major addition to the 30,000 emails that Clinton’s lawyers considered work-related and returned to the department in December 2014. The FBI cleared Clinton of criminal conduct but found her to have have been “extremely careless”, and the saga continues to dog her.

On 5 August the FBI completed a transfer of several thousand previously undisclosed work-related emails for the state department to review and publish. Responding to the news, the Republican National Committee chairman, Reince Priebus, said Clinton “seems incapable of telling the truth”. State lawyers told federal judge James Boasberg on Monday they expected to release the emails in batches on 14, 21 and 28 October and 4 November. The election, against Republican nominee Donald Trump, takes place on 8 November. Boasberg ordered that the department should aim for a more ambitious deadline. The judge set another hearing for 22 September, so progress can be reviewed.

Tom Fitton, president of the conservative legal group Judicial Watch, which brought the case under a Freedom of Information Act (Foia) request, tweeted: “FBI found almost 15,000 new Clinton documents. When will state release them?” Another federal judge, Emmet Sullivan, last week ordered Clinton to answer written questions from Judicial Watch. Her answers are not due until after the presidential election.

“The Oversight committee is slated to hold a hearing next month to look at the possibility of bringing perjury charges against the former secretary of state. FBI Director James Comey has been named as a possible witness.”

• Chaffetz: FBI’s Notes From Clinton Interview Keep Changing (WE)

The FBI has handed Congress two copies of notes from its interview with Hillary Clinton about her private email server, but according to the chairman of the House Oversight Committee, the two sets of notes aren’t consistent with each other. “The … thing that is stunning to me, which I found out last night, is the FBI gave us one set of documents. Then we asked them, and they … gave us a second copy in a classified setting. But they’re different,” said committee Chairman Rep. Jason Chaffetz in a Monday morning interview on MSNBC. The Utah Republican said he had no explanation, and that he would have to seek one from the FBI. “We have a second set of documents that’s now different. You turn them page by page, and they’re different. I don’t know why that happens,” Chaffetz added.

Chaffetz said there was “new information” in the second set of documents, which has left the committee confused. “So we’re going back to square one. We’ve only had them for days, but still, the second copy is different from the first copy. Why is that?” he asked. Asked whether he would pursue perjury charges against Clinton for making misleading statements to Congress, Chaffetz demurred, but did criticize the FBI. “I’m stunned the FBI director came before Congress and testified that during their year-long investigation, they never looked at the under oath testimony from Hillary Clinton.” “You’re kidding me? You’re doing an investigation about the email scandal, and you never look at what she said under oath? Politicians lie, but when you’re under oath, you can’t do that,” Chaffetz said.

The Oversight committee is slated to hold a hearing next month to look at the possibility of bringing perjury charges against the former secretary of state. FBI Director James Comey has been named as a possible witness. It would the second time in as many months that Comey has been called before Congress to explain the investigation into Clinton’s emails.

Emails, Clinton Foundation, I still can’t see how she would be electable. Time to bring in Joe Biden?

• Foundation Ties Bedevil Hillary Clinton’s Presidential Campaign (NYT)

The kingdom of Saudi Arabia donated more than $10 million. Through a foundation, so did the son-in-law of a former Ukrainian president whose government was widely criticized for corruption and the murder of journalists. A Lebanese-Nigerian developer with vast business interests contributed as much as $5 million. For years the Bill, Hillary and Chelsea Clinton Foundation thrived largely on the generosity of foreign donors and individuals who gave hundreds of millions of dollars to the global charity. But now, as Mrs. Clinton seeks the White House, the funding of the sprawling philanthropy has become an Achilles’ heel for her campaign and, if she is victorious, potentially her administration as well.

With Mrs. Clinton facing accusations of favoritism toward Clinton Foundation donors during her time as secretary of state, former President Bill Clinton told foundation employees on Thursday that the organization would no longer accept foreign or corporate donations should Mrs. Clinton win in November. But while the move could avoid the awkwardness of Mr. Clinton jetting around the world asking for money while his wife is president, it did not resolve a more pressing question: how her administration would handle longtime donors seeking help from the United States, or whose interests might conflict with the country’s own.

The Clinton Foundation has accepted tens of millions of dollars from countries that the State Department — before, during and after Mrs. Clinton’s time as secretary — criticized for their records on sex discrimination and other human-rights issues. The countries include Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman, Brunei and Algeria. Saudi Arabia has been a particularly generous benefactor. The kingdom gave between $10 million and $25 million to the Clinton Foundation. (Donations are typically reported in broad ranges, not specific amounts.) At least $1 million more was donated by Friends of Saudi Arabia, which was co-founded by a Saudi prince.

Germany’s call yesterday for people to hoard cash changes this game.

• US Banks Want To Cut Branches, But Customers Keep Coming (R.)

Despite banks’ nudging toward online tools, many U.S. customers are not ready to give up regular visits to their nearest branch, complicating the industry’s efforts to slim down. U.S. banks have trimmed the number of branches by 6% since it peaked in 2009, according to Federal Deposit Insurance Corp data. The 93,283 branches open at the end of last year was the lowest level in a decade. Yet analysts who have examined the data say banks should have done more to offset the pressure on revenue from low interest rates and regulatory demands. The number of FDIC-insured banks has fallen by more than 25% over that time even as industry assets have grown, indicating room for greater branch consolidation.

Bank executives argue, however, that branches remain crucial for acquiring new customers and doing more business with existing ones. Closures, they say, would hurt revenue more than help reduce costs. “Our customers still want to visit us,” Jonathan Velline, Wells Fargo’s head of ATM and store strategy, told Reuters in an interview. “They’re still coming to our stores and our ATMs at pretty consistent rates.” Bankers across the industry share that view. They say online banking complements traditional services for U.S. customers, but few have gone fully digital.

Jim gets back to basics: oil was always a one-off, and there are no replacements.

• Dark Dynamics (Jim Kunstler)

What the world is witnessing, without actually paying much attention, is the death of our debt-based economy — that is, borrowing the means to thrive in the now from a future that can’t really furnish it anymore. The illusion that the future would always provide was a legacy of the cheap energy era. That era ended in 2005. The basic promise is broken and with it the premise for living as we had been. The energy available today, especially oil, is no longer cheap enough to run the industrial economies designed to run on it. Any way that you look at the dynamic, Modernity loses. With oil under $50 a barrel, and gasoline under $3 a gallon (back east), the public apparently thinks that the Peak Oil story is dead and gone.

But when it costs $75 a barrel to pull the stuff out of the ground, and the stuff only sells for $47 a barrel, the oil companies’ business model doesn’t really work. The shale oil companies especially have been gaming the system by issuing bonds that pay relatively high interest rates in an investment climate where almost nothing else offers enough yield to live on, especially for pension funds and insurance companies. Two little upward bumps this year in the price of oil toward the $50 range prompted a wish that the good old days of high-priced oil were coming back, that the oil business would be profitable again. The trouble is that high oil prices – say, over $100 a barrel, as it was in 2014 – crush advanced economies, so that demand for oil crashes, and with it productive activity.

Without productivity, the debts issued by companies (and even governments) don’t get repaid. There really is no “sweet spot” in this energy cost equation. A lot of wishful thinkers would like to believe that you can run contemporary life on something beside oil. But the usual “solutions,” solar and wind energy, don’t pencil out, especially when you consider that the hardware for running them – the photovoltaics, charge controllers, batteries, turbines, and blades, can’t be mass-produced and distributed without the very fossil fuels they are supposed to replace.

James Galbraith runs with Yanis’ ideas for DiEM25.

• From The Destruction Of Greece To Democracy In Europe (Galbraith)

In Protesting the Treaty of Versailles ending World War I, John Maynard Keynes wrote: “The policy . . . of depriving the lives of millions of human beings, of depriving a whole nation of happiness should be abhorrent and detestable — abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe.” Last year’s third bailout of Greece, imposed by Europe and the International Monetrary Fund, does to Greece what Versailles did to Germany: It strips assets to satisfy debts. Germany lost its merchant marine, its rolling stock, its colonies, and its coal; Greece has lost its seaports, its airports — the profitable ones — and is set to sell off its beaches, the public asset that is a uniquely Greek glory.

Private businesses are being forced into bankruptcy to make way for European chains; private citizens are being forced into foreclosure on their homes. It’s a land grab. And for what? To satisfy old public debts, incurred for tanks, submarines, the Olympics, big construction projects outsourced to German firms, and to hide deficits in health care, with creditor connivance — a quagmire of graft to support an illusion, that Greece could “compete” as part of the euro. Already in 2010 the IMF knew it was breaking its own rules by pretending that Greece could recover quickly, sustain a huge primary surplus, and repay its debts. Why? To help save French and German banks, which the IMF’s sainted managing director, Dominique Strauss-Kahn, wanted to do, because he wanted to be president of France.

Europe crushed the Greek resistance in 2015. Not because Wolfgang Schäuble, the German finance minister, thought his economic plan would work; he candidly told the Greek finance minister, Yanis Varoufakis, that “as a patriot” he would not sign it himself. But Germany wants to impose its order on Italy and on France, where civil society continues to fight back. And Chancellor Angela Merkel could not admit to her voters, or to fellow Europeans from Slovakia to Portugal, that back in 2010 she’d saved Germany’s banks by saddling them with Greek debts that could never be paid. Greece was given collective punishment as a lesson. It was done to show that “there is no alternative.” It was done to stop any other attempt to develop, articulate, and defend a more rational policy. It was done to protect the power of the ECB, the German government in Europe, and the policy-making authority, in face of a long record of failure, of the IMF.

Routine procedure.

• Coast Guard Fired at Migrant Boats, European Border Agency Documents Show (IC)

On a smuggler’s boat from Turkey two years ago, 19-year-old Rawan watched the passengers start to panic as a Greek coast guard vessel approached them head on, circling twice. Rawan heard two gunshots ring out from the Greek patrol. Fearing arrest, the driver of Rawan’s boat, a Turkish fisherman, turned the vehicle around to flee back to Turkey. Then Rawan heard more shots. When the bullet hit her in the lower back, at first she felt nothing. Then, Rawan says, it felt like fire. Rawan’s husband had made it to Germany a year earlier; both were fleeing their home in Damascus, Syria. Rawan and 12 other Syrians were headed for the Greek island of Chios on a small fiberglass boat, much faster than the inflatable dinghies that many refugees use for the 5-mile crossing.

Before the shots, Rawan heard “stop” blare over a loudspeaker on the coast guard vessel. She and four others were in the forward compartment of the boat, and more people were sitting in the back near the outboard engine. Rawan’s father-in-law, Adnan Akil, was also shot in the lower back, and Amjad A., another Syrian refugee who asked that only his first name and last initial be used, was shot in the shoulder. Akil says he clearly remembers the chain of events leading up to the shooting. One officer had a pistol, the other had a submachine gun. Akil, Rawan, and other witnesses say they heard one officer shoot in automatic bursts. “We were shouting and screaming for the driver to stop,” remembers Braa Abosaleh, another Syrian refugee who was on the boat that day.

When the driver didn’t stop, the coast guard rammed their boat from the back right side. Akil and Rawan remember the driver stopping the boat, pretending he was going to surrender. As the officers put down their weapons and approached, the driver fired up the engine again and turned back toward Turkey. This time, the coast guard shot directly at the fleeing boat.

I fear for Greece between now and (into) 2017.

• Greece Plans New Refugee Centers As New Arrivals Soar (Kath.)

Greek authorities hope that the construction of a new migrant reception center in Thiva, central Greece, which is set to be completed in the coming days, will ease congestion in camps on the country’s eastern Aegean islands, while plans are also under way to open a refugee facility on Crete. “The situation on the islands is only marginally under control,” a source inside the Public Order Ministry told Kathimerini on condition of anonymity on Monday. Authorities are said to be drawing up plans to create so-called “closed-structure” detention camps on the islands to separate individuals who are scheduled to be repatriated – as well as troublemakers – from those who have passed a first screening in their claim for international protection.

Meanwhile, migrants with a criminal past will be transferred from the islands to pre-departure centers on mainland Greece. About 300 individuals have already been transferred and another 100 are to follow in the coming days. Less straightforward are the government’s plans to construct migrant reception facilities on the island of Crete. Officials at the Ministry for Immigration Policy told Kathimerini that, by the end of September, local authorities are expected to propose sites where these facilities could be built. “Any plans are to take effect as of November, after the island’s tourism season has drawn to a close,” an unnamed official said.

Debt Rattle August 18 2016

Aug 182016

August 18, 2016 Posted by Raúl Ilargi Meijer at 8:51 am Finance Tagged with: buybacks, carnage, central bankers, genocide, Japan, nukes, oil, pilots, refugees, slaughter, TPP, Yemen 2 Responses »

NPC George W. Cochran & Co., 709 14th Street NW, Washington DC 1920

• Japanese Imports Drop -24.7%, Exports Crash -14.1% (ZH)

• A Physics Lesson for Central Bankers (BBG)

• The Idea Of The Fed Raising The Inflation Target Is Outrageous (Boockvar)

• On The Impossibility Of Helicopter Money And Why The Casino Will Crash (DS)

• US Buyback Announcements Tumble to a 2012 Low (BBG)

• Oil Drillers Have Slashed Spending For 2015-2020 By $1 Trillion

• Only 37% Of Borrowers Are Paying Down Their Student Loans (WSJ)

• Chinese Airlines Need To Hire 100 Pilots A Week For The Next 20 Years (BBG)

• Hillary Clinton Picks TPP and Fracking Advocate To Set Up Her White House (IC)

• Is US Moving Nuclear Weapons From Turkey to Romania? (EurA)

• America Is Complicit in the Carnage in Yemen (NYT Editorial Board)

• California Slaughter: The State-Sanctioned Genocide of Native Americans (NW)

• Uncovering The Brutal Truth About The British Empire (G.)

• Greek Villagers Rescued Refugees. Now They Are the Ones Suffering. (NYT)

Apparently Kuroda doesn’t buy enough yet.

• Japanese Imports Drop -24.7%, Exports Crash -14.1% (ZH)

For the 19th month in a row, Japanese Imports plunged – dropping 24.7% YoY (worse than expected), the biggest drop since Oct 2009. Exports were just as dismal, also missing expectations, plunging 14.1% YoY – worst since Oct 2009. The biggest driver of the collapse of Japanese trade was a 44% crash in the Chinese trade balance. There’s no lipstick to put on this pig… it’s a disaster.. and worse still Yen is strengthening back below 100 against the USD.

Why not simply admit that central bankers and economists alike have no idea what they’re doing?! Even if they ever had a clue, we’re now 8 years into ‘uncharted territory’, and it’s all anyone‘s guess. That’s what ‘uncharted territory’ means.

Moreover, central bankers and economists come in with dogmatic school book theories that don’t apply in ‘uncharted territory’, and those school book educations make sure they’re the very last candidates for finding creative solutions. Comparing economics to actual science does not help one bit.

• A Physics Lesson for Central Bankers (BBG)

The world is braced for the discovery of a fifth fundamental forces of nature – the four known ones being electromagnetism, gravity, and strong and weak nuclear forces – that subverts the so-called standard model of particle physics. Given the lackluster outlook for global growth, maybe economics needs a similar revolution. Quantitative easing’s failure to quash the threat of deflation is finance’s equivalent of the bump in the data that alerted physicists to the possibility of a new boson. The mismatch between economic theory and the real-world outcome of zero interest rates poses a direct challenge to the current orthodoxy that puts a 2% inflation target at the heart of monetary policy in most of the developed world.

Figures earlier this week showed inflation running at an annual pace of just 0.8% in the U.S. and 0.6% in the U.K. Consumer prices in the euro zone are rising by about 0.2% a year; in Japan, prices dropped by 0.4% in June. The consensus forecast among economists surveyed by Bloomberg News is for none of the four central banks in those regions to meet their targets in 2016, and for the ECB and the BOJ to continue falling short for at least the next year:

Years of pumping trillions of dollars, euros, yen and pounds into the economy by buying government debt and other securities hasn’t produced the rebound in inflation that economics textbooks predicted. Record low borrowing costs haven’t led to a surge in investment and spending that would lead to higher prices. That’s the kind of empirical evidence that should produce a reconsideration of what Rothschild Investment Trust Chairman Jacob Rothschild this week called “the greatest experiment in monetary policy in the history of the world.” Neil Grossman, director of Florida-based bank C1 Financial and former chief investment officer at TKNG Capital Partners, likens the need to abandon the current economic orthodoxy with the impact of quantum physics on science in the last century.

“There is no science to this 2% number, it is all art.”

• The Idea Of The Fed Raising The Inflation Target Is Outrageous (Boockvar)

I can’t let an opportunity go by without criticizing a Fed official. I believe their feet should be held to the fire after creating a huge asset price bubble and culture of debt that is dragging down economic growth. Fed President John Williams comments yesterday really got me angry. First, he suggested possibly raising the Fed’s 2% inflation target. This reflects an amazing cluelessness of the damage this would do if realized. We are in an epic bond bubble globally where higher inflation would be kryptonite. With the bond monster central bankers have created, the last thing they should want is higher inflation. Also, many U.S. citizens are literally living paycheck to paycheck and a higher cost of living without a corresponding increase in wages or any interest income would damage the largest component of the U.S. economy and the lives of millions.

Second, he said, “Conventional monetary policy has less room to stimulate the economy during an economic downturn.” This we know is true. But he then added, “This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates.” This last sentence proves he’s blind to the negative consequences of what unconventional tools have wrought and he believes in negative rates even in the face of all the evidence of how damaging the idea is. Let me expand on the first issue of inflation. Central banks in the U.S., Eurozone, UK and in Japan have tethered their monetary policy decisions on growth certainly but also the desire for 2% annual inflation. There is no science to this 2% number, it is all art.

The reason for this target and desire for this level of inflation is a matter of control. While they like to keep interest rates artificially low, they also understand the need to have them higher than they are in order to respond to any economic challenges. The fallacy with this theory that higher inflation is good and deflation is bad, is inflation is just a symptom of underlying supply and demand and technological improvements, and thus shouldn’t be manipulated.

Stockman: “..earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher..”

• On The Impossibility Of Helicopter Money And Why The Casino Will Crash (DS)

[..] .. the S&P 500 companies posted Q2 2016 earnings for the latest 12 month period at $86.66 per share. So at the August bubble high the market was being valued at a lunatic 25.1X. Even in a healthy, growing economy that valuation level is on the extreme end of sanity. But actual circumstances are currently more nearly the opposite. That is, earnings have now been falling for six straight quarters in line with GDP growth that has slumped to what amounts to stall speed. In fact, reported earnings for the S&P 500 peaked at $106 per share in the 12 months ended in September 2014. That means that earnings had fallen by 19% since then, even as the stock market moved from 1950 to nearly 2200 or 13% higher.

This is called multiple expansion in the parlance of Wall Street, but it’s hard to find a more bubblicious example. Two years ago the market was trading at just 18.4X, meaning that on the back of sharply falling earnings the PE multiple had risen by 36%! Valuation multiples are supposed to go up only when the economic and profits outlook is improving, not when it’s unmistakably deteriorating as at present. But during the spring-summer melt-up these faltering fundamentals were blithely ignored on the hopes of a second half growth spurt and, failing the latter, that the Fed would again pull the market’s chestnuts out of the fire.

Time for Yellen to buy those stocks? Buybacks were the no. 1 reason the S&P looked good till now. Better find something to replace them, or else…

• US Buyback Announcements Tumble to a 2012 Low (BBG)

Stock buybacks appear to be slowing down, suggesting either corporate America’s outlook has dimmed, stock valuations have become prohibitively high or, most optimistically, that companies are starting to listen to investors and put funds toward other uses. Buybacks announced for the second quarter’s earnings season between July 8 and August 15 totaled an average of $1.8 billion a day, the lowest volume in an earnings season since the summer of 2012, according to TrimTabs Investment Research.
Share repurchases have been a key driver of this year’s stock market rally, despite a notable deceleration relative to to the same period in 2015. In the first seven months of 2016, buybacks totaled $376.5 billion, according to TrimTabs.

That’s down 21% from $478.4 billion in the first seven months of last year. Equity buybacks last week totaled just $2.6 billion, while record highs in U.S. stocks triggered an increase in new equity offerings. “The reluctance to pull the trigger on share repurchases suggests corporate leaders are becoming less enthusiastic about what they see ahead,” David Santschi, chief executive officer of TrimTabs, said in a press release on Tuesday. That means “buybacks aren’t likely to provide as much fuel for the stock market as they have in the recent past.” According to TrimTabs, just five companies have announced buybacks of more-than $3 billion this earnings season: Biogen ($5 billion), Visa ($5 billion), CBS ($5 billion), AIG ($3 billion), and 21st Century Fox ($3 billion).

Hard to admit to something that will cost you your livelihood. They all keep hoping for rising prices.

• Oil Drillers Have Slashed Spending For 2015-2020 By $1 Trillion

Mad Dog, BP’s drilling project deep in the Gulf of Mexico, could be Exhibit A in the oil industry’s war on cost. When the British oil giant announced the project’s second phase in 2011, it put the price at $20 billion. Last month, after simplifying plans and benefiting from a sharp drop in everything from steel to drilling services, Chief Executive Officer Bob Dudley said he could do the job for $9 billion.

Across the industry, companies have taken a chainsaw to expenses, slashing spending for the 2015-to-2020 period by $1 trillion through cutting staff, delaying projects, changing drilling techniques and squeezing outside contractors, according to consulting firm Wood Mackenzie. That’s cushioned businesses as oil prices plunged 60% since 2014. Now producers seek to show they can make the savings stick, while service providers try to reverse their losses. Industry costs “may be the defining issue of the next six to 12 months,” said J. David Anderson, a Barclays analyst in New York. “As you start ramping up, the fact is you’re going to need more services and they’re going to have to come in at a higher price.”

Someone will come with an across the board forgiveness plan. But it’ll be contentious.

• Only 37% Of Borrowers Are Paying Down Their Student Loans (WSJ)

A largely overlooked report released in February by the Government Accountability Office suggests that the Obama administration’s policies have exacerbated student debt, which equals nearly a quarter of annual federal borrowing. With only 37% of borrowers actually paying down their loans, the federal student-loan program more closely resembles the payday-lending industry than a benevolent source of funds for college. As this newspaper reported in April, “43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1,” and a staggering “1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt.”

If student debt continues to skyrocket, the federal government may have to deal with as much as a $500 billion write-down when future defaults and loan-forgiveness programs are factored in. In 2010, the Obama administration dispensed with the private intermediaries that had administered federal loans since the 1960s. It put in their place Direct Lending, a program administered by the Education Department. At the time, the Congressional Budget Office estimated that Direct Lending would save $62 billion from 2010 to 2020. That didn’t happen. The program’s advocates failed to anticipate how two other Obama-backed college affordability initiatives—Income-Driven Repayment and loan forgiveness—would create a cataclysmic hit to the federal student-loan program’s finances.

There are more than 20 Income-Driven Repayment programs, but they all work essentially the same way. Students struggling financially can defer their payments. When no or limited payments are made, their balances grow. Today, over 20 million borrowers are watching their loan balances increase thanks to these programs. The average balance ballooned to approximately $25,000 in 2014 from $15,000 in 2004, according to the Federal Reserve Bank of New York, and has grown still larger since then.

In their dreams.

• Chinese Airlines Need To Hire 100 Pilots A Week For The Next 20 Years (BBG)

Chinese airlines need to hire almost 100 pilots a week for the next 20 years to meet skyrocketing travel demand. Facing a shortage of candidates at home, carriers are dangling lucrative pay packages at foreigners with cockpit experience. Giacomo Palombo, a former United Airlines pilot, said he’s being bombarded every week with offers to fly Airbus A320s in China. Regional carrier Qingdao Airlines promises as much as $318,000 a year. Sichuan Airlines, which flies to Canada and Australia, is pitching $302,000. Both airlines say they’ll also cover his income tax bill in China. “When the time to go back to flying comes, I’ll definitely have the Chinese airlines on my radar,” said Palombo, 32, now an Atlanta-based consultant for McKinsey. “The financials are attractive.”

Air traffic over China is set to almost quadruple in the next two decades, making it the world’s busiest market, according to Airbus Group SE. Startup carriers barely known abroad are paying about 50% more than what some senior captains earn at Delta Air Lines, and they’re giving recruiters from the U.S. to New Zealand free rein to fill their captains’ chairs. With some offers reaching $26,000 a month in net pay, pilots from emerging markets including Brazil and Russia can quadruple their salaries in China, said Dave Ross, Las Vegas-based president of Wasinc International. Wasinc is recruiting for more than a dozen mainland carriers, including Chengdu Airlines, Qingdao Airlines and Ruili Airlines. “When we ask an airline, ‘How many pilots do you need?,’ they say, ‘Oh, we can take as many as you bring,”’ Ross said. “It’s almost unlimited.”

Incredible, but he really said it: “..there’s not a single case where hydraulic fracking has created an environmental problem for anyone..”

• Hillary Clinton Picks TPP and Fracking Advocate To Set Up Her White House (IC)

Two big issues dogged Hillary Clinton during the Democratic primary: the Trans-Pacific Partnership trade agreement (TPP) and fracking. She had a long history of supporting both. Under fire from Bernie Sanders, she came out against the TPP and took a more critical position on fracking. But critics wondered if this was a sincere conversion or simply campaign rhetoric. Now, in two of the most significant personnel moves she will ever make, she has signaled a lack of sincerity. She chose as her vice presidential running mate Tim Kaine, who voted to authorize fast-track powers for the TPP and praised the agreement just two days before he was chosen.

And now she has named former Colorado Democratic Senator and Interior Secretary Ken Salazar to be the chair of her presidential transition team — the group tasked with helping set up the new administration should she win in November. That includes identifying, selecting, and vetting candidates for over 4,000 presidential appointments. As a senator, Salazar was widely considered a reliable friend to the oil, gas, ranching and mining industries. As interior secretary, he opened the Arctic Ocean for oil drilling, and oversaw the botched response to the BP oil spill in the Gulf of Mexico. Since returning to the private sector, he has been an ardent supporter of the TPP, while pushing back against curbs on fracking.

The TPP would enhance the ability of corporations to sue to overturn environmental regulations, but Salazar helped a pro-TPP front group, the “Progressive Coalition for American Jobs,” argue the opposite. In a November 2015 USA Today op-ed that Salazar co-wrote with Bruce Babbitt, the two men argued that the TPP would be the “the greenest trade deal ever” by promoting sustainable energy. Both Salazar and Babbitt cited their former positions as interior secretaries to boost their credibility. The following month, Salazar authored a Denver Post op-ed with two former Colorado governors also affiliated with PCAJ, arguing that the agreement would protect the state’s scenic beauty: “And as a state rich with natural wonder and a long history of conservation, Colorado can be proud that the TPP includes the highest environmental standards of any trade agreement in history.”

Shortly after leaving his post at the Obama administration, Salazar appeared at an oil and gas industry conference to argue in favor of fracking. “We know that, from everything we’ve seen, there’s not a single case where hydraulic fracking has created an environmental problem for anyone,” Salazar told the attendees, who included the vice president of BP America, another keynote speaker at the conference. “We need to make sure that story is told.”

Not confirmed. But moving them out of Turkey seems logical. Not exactly a safe third country these days.

• Is US Moving Nuclear Weapons From Turkey to Romania? (EurA)

Two independent sources told EurActiv.com that the US has started transferring nuclear weapons stationed in Turkey to Romania, against the background of worsening relations between Washington and Ankara. According to one of the sources, the transfer has been very challenging in technical and political terms. “It’s not easy to move 20+ nukes,” said the source, on conditions of anonymity. According to a recent report by the Simson Center, since the Cold War, some 50 US tactical nuclear weapons have been stationed at Turkey’s Incirlik air base, approximately 100 kilometres from the Syrian border.

During the failed coup in Turkey in July, Incirlik’s power was cut, and the Turkish government prohibited US aircraft from flying in or out. Eventually, the base commander was arrested and implicated in the coup. Whether the US could have maintained control of the weapons in the event of a protracted civil conflict in Turkey is an unanswerable question, the report says. Another source told EurActiv.com that the US-Turkey relations had deteriorated so much following the coup that Washington no longer trusted Ankara to host the weapons. The American weapons are being moved to the Deveselu air base in Romania, the source said. Deveselu, near the city of Caracal, is the new home of the US missile shield, which has infuriated Russia.

It doesn’t sit well with me at all that the NYT editors are saying this. Far too much blood on those hands. It doesn’t feel right one bit.

• America Is Complicit in the Carnage in Yemen (NYT Editorial Board)

A hospital associated with Doctors Without Borders. A school. A potato chip factory. Under international law, those facilities in Yemen are not legitimate military targets. Yet all were bombed in recent days by warplanes belonging to a coalition led by Saudi Arabia, killing more than 40 civilians. The United States is complicit in this carnage. It has enabled the coalition in many ways, including selling arms to the Saudis to mollify them after the nuclear deal with Iran. Congress should put the arms sales on hold and President Obama should quietly inform Riyadh that the United States will withdraw crucial assistance if the Saudis do not stop targeting civilians and agree to negotiate peace.

The airstrikes are further evidence that the Saudis have escalated their bombing campaign against Houthi militias, which control the capital, Sana, since peace talks were suspended on Aug. 6, ending a cease-fire that was declared more than four months ago. They also suggest one of two unpleasant possibilities. One is that the Saudis and their coalition of mostly Sunni Arab partners have yet to learn how to identify permissible military targets. The other is that they simply do not care about killing innocent civilians. The bombing of the hospital, which alone killed 15 people, was the fourth attack on a facility supported by Doctors Without Borders in the past year even though all parties to the conflict were told exactly where the hospitals were located.

In all, the war has killed more than 6,500 people, displaced more than 2.5 million others and pushed one of the world’s poorest countries from deprivation to devastation. A recent United Nations report blamed the coalition for 60% of the deaths and injuries to children last year. Human rights groups and the United Nations have suggested that war crimes may have been committed.

Today Yemen, yesterday California. Maybe if we stop trying to hide the past, we’re less likely to repeat it?!

• California Slaughter: The State-Sanctioned Genocide of Native Americans (NW)

The tally is relentlessly grim: a whole settlement wiped out in Trinity County “excepting a few children”; an Indian girl raped and left to die somewhere near Mendocino; as many as 50 killed at Goose Lake; and, two months later, as many as 257 murdered at Grouse Creek, scores of them women and children. There were the four white ranchers who tracked down a band of Yana to a cave, butchering 30. “In the cave with the meat were some Indian children,” reported a chronicle published later. One of the whites “could not bear to kill these children with his 56-calibre Spencer rifle. ‘It tore them up so bad.’ So he did it with his 38-calibre Smith and Wesson revolver.”

We might as well stop speaking about western ‘civilization’.

• Uncovering The Brutal Truth About The British Empire (G.)

Help us sue the British government for torture. That was the request Caroline Elkins, a Harvard historian, received in 2008. The idea was both legally improbable and professionally risky. Improbable because the case, then being assembled by human rights lawyers in London, would attempt to hold Britain accountable for atrocities perpetrated 50 years earlier, in pre-independence Kenya. Risky because investigating those misdeeds had already earned Elkins heaps of abuse. Elkins had come to prominence in 2005 with a book that exhumed one of the nastiest chapters of British imperial history: the suppression of Kenya’s Mau Mau rebellion. Her study, Britain’s Gulag, chronicled how the British had battled this anticolonial uprising by confining some 1.5 million Kenyans to a network of detention camps and heavily patrolled villages.

It was a tale of systematic violence and high-level cover-ups. It was also an unconventional first book for a junior scholar. Elkins framed the story as a personal journey of discovery. Her prose seethed with outrage. Britain’s Gulag, titled Imperial Reckoning in the US, earned Elkins a great deal of attention and a Pulitzer prize. But the book polarised scholars. Some praised Elkins for breaking the “code of silence” that had squelched discussion of British imperial violence. Others branded her a self-aggrandising crusader whose overstated findings had relied on sloppy methods and dubious oral testimonies. By 2008, Elkins’s job was on the line. Her case for tenure, once on the fast track, had been delayed in response to criticism of her work.

To secure a permanent position, she needed to make progress on her second book. This would be an ambitious study of violence at the end of the British empire, one that would take her far beyond the controversy that had engulfed her Mau Mau work. That’s when the phone rang, pulling her back in. A London law firm was preparing to file a reparations claim on behalf of elderly Kenyans who had been tortured in detention camps during the Mau Mau revolt. Elkins’s research had made the suit possible. Now the lawyer running the case wanted her to sign on as an expert witness. Elkins was in the top-floor study of her home in Cambridge, Massachusetts, when the call came. She looked at the file boxes around her. “I was supposed to be working on this next book,” she says. “Keep my head down and be an academic. Don’t go out and be on the front page of the paper.”

She said yes. She wanted to rectify injustice. And she stood behind her work. “I was kind of like a dog with a bone,” she says. “I knew I was right.” What she didn’t know was that the lawsuit would expose a secret: a vast colonial archive that had been hidden for half a century. The files within would be a reminder to historians of just how far a government would go to sanitise its past. And the story Elkins would tell about those papers would once again plunge her into controversy.

But not everyone has lost it: “If it happens again, everyone will do the exact same thing: We will help.”

• Greek Villagers Rescued Refugees. Now They Are the Ones Suffering. (NYT)

Stratis Valamios revved the motor on his small white boat and steered under a thumbnail moon out of the harbor of this fishing village, perched on the northern tip of Lesbos, Greece’s third-largest island. Skies were clear enough to see the purple mountains of Turkey a short distance across the Aegean Sea. It would be easy on this tranquil evening to catch calamari. These days, he needed a good haul to make ends meet. A year ago, he and other fishermen in the tiny village, Skala Sikaminias, were making a more unusual catch: thousands of sea-drenched asylum seekers who streamed across the Aegean to escape conflict and poverty in the Middle East and Africa.

As one of the landfalls in Greece that is closest to Turkey, Skala Sikaminias, with its 100 residents, fast became ground zero for the crisis, the first stop in Europe for people trying to reach Germany in a desperate bid to start new lives. “I’d be in the middle of the sea, and I would see 50 boats zigzagging toward me,” Mr. Valamios said, gazing across the narrow channel. “I would speed toward them, and they would throw their children into my boat to be saved.” Today the migrants have mostly stopped coming. The coastline, once littered with orange life vests and wrecked boats, has been cleaned to a near-spotless white. But the human drama has left an imprint here, and across all of Lesbos, in ways that have only begun to play out.

The village is nearly empty of tourists this year as Germans, Swedes and other visitors who had long flocked to the crystalline waters of Lesbos go elsewhere, wary of spending their vacations in a place now associated with human desperation. Business at the island’s hotels and tavernas has slumped around 80%, especially along the 7.5-mile stretch between Skala Sikaminias and the vacation town of Molyvos, where many of the more than 800,000 migrants who survived the crossing last year washed ashore. Mr. Valamios used to supplement his income as a fisherman by working five months of the year at Myrivilis’ Mulberry taverna, facing the bucolic port where fishermen mend yellow nets beneath oleanders and village cats prowl for fish. This year, he was asked to work just one month amid a dearth of customers. Nearly 1,000 Greeks in the area have lost seasonal employment.

[..] The villagers no longer experience the sea in the same way. When they look at the horizon, some say they think for a split second that another refugee boat is coming. “We have to be ready,” Mr. Valamios said. “If it happens again, everyone will do the exact same thing: We will help.”

Debt Rattle July 29 2016

Jul 292016

July 29, 2016 Posted by Raúl Ilargi Meijer at 9:20 am Finance Tagged with: Abenomics, deflation, earnings, global trade, Greece, IMF, Japan, Kuroda, oil, recession, refugees 2 Responses »

Dorothea Lange Crossroads grocery store and filling station, Yakima, Washington, Sumac Park 1939

• IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)

• Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)

• Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)

• Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)

• Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)

• Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)

• Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)

• US Homeownership Rate Falls to Five-Decade Low (WSJ)

• Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)

• Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)

• In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)

• Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

” They had no fall-back plans on how to tackle a systemic crisis in the eurozone [..] because they had ruled out any possibility that it could happen.”

“Some staff members warned that the design of the euro was fundamentally flawed but they were overruled..”

Ambrose on Twitter: ”IMF seems to have slipped leash of political control. Even its own watchdog in dark on EMU crisis. Astonishing saga..”

• IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)

The IMF’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions. It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking break-down in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation. The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde.

It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the Fund to rescue their own rich currency union and banking system. The three main bail-outs for Greece, Portugal, and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000% of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the Fund between 2011 and 2014. In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff,” it said. The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen. “Before the launch of the euro, the IMF’s public statements tended to emphasize the advantages of the common currency, “ it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.

The forecasts for Greek growth compared to what actually happened Credit: IMF

[..] While the Fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bail-out sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability. A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced cut – what ex-finance minister Yanis Varoufakis called “fiscal water-boarding”. “The automatic stabilizers were not allowed to operate, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction,” said the report.

Who says we need global growth?

• Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)

Falling rates of global trade growth have attracted much comment by analysts and officials, giving rise to a literature on the ‘global trade slowdown’ (Hoekman 2015, Constantinescu et al. 2016). The term ‘slowdown’ gives the impression of world trade losing momentum, but growing nonetheless. The sense of the global pie getting larger has the soothing implication that one nation’s export gains don’t come at the expense of another’s. But are we right to be so sanguine? Using what is widely regarded as the best available data on global trade dynamics, namely, theWorld Trade Monitor prepared by the Netherlands Bureau of Economic Policy Analysis, the 19th Report of the Global Trade Alert, published today, evaluates global trade dynamics (Evenett and Fritz 2016).

Figure 1 World trade plateaued around the start of 2015

Our first finding that the rosy impression painted by some should be set aside. We demonstrate that: •World export volumes reached a plateau at the start of January 2015. The same finding holds if import volume or total volume data are used instead. •Both industrialised countries’ and emerging markets’ trade volumes have plateaued (Figure 1). •Except during global recessions, a plateau lasting 15 months is practically unheard of since the Berlin Wall fell. •In 2015 the best available data on world export volumes diverges markedly from that reported by the WTO, IMF, and World Bank, and probably explains why analysts at these organisations have missed this profound change in global trade dynamics (Table 1).

Table 1 Marked differences in reported global trade volume growth in 2015

“The fight against sluggish growth rates..” Maybe we should stop that fight?

• Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)

While monetary policy may be at — or beyond — the limits of its usefulness in stoking global growth, economists at Deutsche Bank say fiscal stimulus is unlikely to be much more effective. At least, not the kind that is politically possible. The fight against sluggish growth rates and low inflation has seen central banks from Europe to Japan buy up swaths of the bond market, and experiment with negative interest rates. Yet with growth still stubbornly slow, these efforts are seen either as ineffective or counterproductive, spurring calls for more active fiscal policy, whether it take the form of tax cuts or ‘helicopter money’ transfers to the private sector. Just this past weekend, finance ministers from the Group of Twenty meeting in China gave strong backing to this view.

“Monetary policy alone cannot lead to balanced growth,” they said. “Fiscal strategies are equally important to support our common growth objectives.” Those comments could signal a “new direction for fiscal policy,” according to Deutsche Bank economists led by Peter Hooper. Yet while they welcomed the potential dethroning of monetary policy as “the principal lever of support,” the economists expect that the boost to global growth from the most probable fiscal packages “is likely to be modest.” Europe is in greatest need of fiscal stimulus — even though the ECB has been gobbling up bonds since 2014, and has cut its deposit rate to minus 0.4% — and it’s also where fiscal stimulus would be most effective, according to the Deutsche Bank economists.

Are Kuroda and Abe drifting apart?

• Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)

Welcome to Japan, where a central bank plan to pump $26 billion a year more into stocks and continue buying 30 times that in debt sees equities struggle to advance and bonds plunge. The Topix index slid as much as 1.4% in Tokyo after the Bank of Japan boosted its annual exchange-traded fund budget to 6 trillion yen ($58 billion), from 3.3 trillion yen. Japanese government bonds headed for their steepest slump since 2008, as policy makers retained a plan to expand the monetary base by an annual 80 trillion yen. Speculation among investors and analysts that Friday’s policy announcement might even see the adoption of so-called helicopter money, as well as a cut to the negative deposit rate, resulted in a lukewarm reception for the expanded stimulus program.

The yen surged as much as 2.4%, the most since the U.K. decision to leave the European Union, even as BOJ Governor Haruhiko Kuroda hinted more easing might still be in the pipeline. “The BOJ had a choice of about five boxes to tick today, but only chose one,” said Sean Callow, a senior FX strategist at Westpac Banking in Sydney. “Buying more ETFs was as widely expected as balloons dropping on Hillary.” [..] In an unexpected development, Kuroda has ordered an assessment of the effectiveness of BOJ policy, to be undertaken at the next meeting, which is scheduled for Sept. 20-21.

“The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

• Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)

The Bank of Japan has announced a modest expansion of its monetary easing programme, blaming Britain’s decision to leave the European Union as the biggest uncertainty facing world markets. The central bank acknowledged government pressure for more action to drive the yen lower and help Japan’s legion of exporters, but stopped short of upping its bond purchases or cutting interest rates. Instead the bank sanctioned an increase in purchases of exchange-traded funds as it attempted to accelerate inflation towards its 2% target. The moves disappointed the markets, which had expected another big influx of liquidity. The Nikkei stock average yo-yoed wildly in the aftermath of the move before falling nearly 2% in late afternoon trade.

Other stock markets in the region were also down while futures trading indicated the FTSE100 and Dow Jones would open slightly down on Friday morning. The yen rose 2% against the US dollar, which will frustrate government attempts to devalue the stubbornly high currency. [..] Some market experts said the lack of bold action suggested the bank had decided that the effectiveness of its huge monetary easing programme had reached its limits. “The BOJ did not live up to expectations … increasing ETF purchases makes no contribution to achieving 2% inflation,” said Norio Miyagawa, senior economist at Mizuho Securities. “The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

After Abenomics has been running for 3 years, deflation continues unabated.

• Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)

Japan reported further signs of weakness in its economy in June, with industrial output and consumer spending falling from the year before. The data released Friday were in line with expectations the central bank may follow the government’s lead in opting for more stimulus at a policy meeting that ends Friday. Core inflation excluding volatile food prices dropped 0.5% from 0.4% in May. The Bank of Japan and government have made scant progress toward a 2% inflation goal set more than three year ago, partly due to the prolonged slump in crude oil prices.

Household spending fell 2.2% from a year earlier, while industrial output slipped 1.9% on an annual basis. Earlier this week Prime Minister Shinzo Abe announced plans to propose 28 trillion yen ($267 billion) in spending initiatives to help support the sagging economic recovery. Household incomes rose 0.3% in June, weak for a month when workers commonly receive bonuses.

Let’s not pretend there is a way out for Japan.

• Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)

Japan has aimed a lot of firepower at keeping its currency weak, but a stronger yen might be just what the long moribund economy really needs, said Saxo Bank’s Chief Investment Officer Steen Jakobsen. “The government of Japan sort of quasi-promises to maintain a weak yen in order to support and buy time for the export companies,” Jakobsen said. “Having a focus only on the export sector takes away from [what] the focus should be: To reform the domestic economy.” Jakobsen’s comments came just as Japan appears set to level a double bazooka of easing at its sluggish economy, firepower that appears aimed, at least in part, at wiping out the recent gains in the newly resurgent yen.

The Bank of Japan was widely expected to announce another monetary easing bomb at the close of its two-day meeting on Friday, with analysts anticipating that the central bank would either cut interest rates deeper into negative territory or expand its asset purchase program or both. At the same time, fresh fiscal stimulus was expected to offer additional cross fire. News agency Jiji reported that Prime Minister Shinzo Abe had revealed a 28 trillion yen ($265 billion) injection, which Reuters estimated at 6% of Japan’s economy.

The double-barreled approach was in line with Abe’s plan to break Japan’s economy out of a decades-long deflationary spiral. That effort, dubbed Abenomics, was introduced in 2013 with a plan for three “arrows:” A first arrow of massive quantitative easing from the BOJ, followed by a second arrow of increased government spending and a third arrow of structural reforms, including immigration and labor changes. But Jakobsen noted that the latest plan for combined BOJ and fiscal easing just replayed the same strategy. “The present situation we’re talking about is just re-launching arrow one and two,” he said. “We’re still missing arrow number three, which is the reform side.”

It didn’t take long to kill the dream.

• US Homeownership Rate Falls to Five-Decade Low (WSJ)

The U.S. homeownership rate fell to the lowest level in more than 50 years in the second quarter of 2016, a reflection of the lingering effects of the housing bust, financial hurdles to buying and shifting demographics across the country. But the bigger picture also suggests more Americans are gaining the confidence to strike out on their own, albeit as renters rather than buyers. The homeownership rate, the proportion of households that are owner-occupied, fell to 62.9%, half a percentage point lower than the second quarter of 2015 and 0.6%age point lower than the first quarter 2016, the Census Bureau said on Thursday. That was the lowest figure since 1965.

There are many ways to interpret the numbers. Part of the story is the catastrophic housing market collapse, which was especially severe for Generation X—those born from 1965 to 1984. Younger households may struggle to save amid student debt, growing rents, rising home prices and limited inventories of starter homes. Indeed, the homeownership rate for 18- to 35-year-olds slipped to 34.1%, the lowest level in records dating to 1994. At 77.9%, the homeownership rate was highest for those 65 years and over.

But the broader picture suggests a degree of economic strength: Renters are spurring a steady increase in overall household formation. Renter-occupied housing units jumped by 967,000 from the same period a year earlier. Overall, household formation has been fairly steady since the early days of the expansion. A rising number of households suggests more people are optimistic enough to strike out on their own and helps further spur growth as they buy furniture, start families and move up the economic ladder. Indeed, moving into a rental unit has been entirely responsible for rising household formation since the recession began.

“It’s probably going to take a little longer than they expected.” “Demand growth has faltered a bit.”

• Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)

The bullish spirit that gripped oil traders as industry giants from Saudi Arabia to Goldman Sachs declared the supply glut over is rapidly ebbing away. Oil is poised for a drop of 20% since early June, meeting the definition of a bear market. While excess crude production is abating, inventories around the world are brimming, especially for gasoline, and a revival in U.S. drilling threatens to swell supplies further. As the output disruptions that cleared some of the surplus earlier this year begin to be resolved, crude could again slump toward $30 a barrel, Morgan Stanley predicts. “The tables are turning on the bulls, who were prematurely constructive on oil prices on the basis the re-balancing of the oil market was a done deal,” said Harry Tchilinguirian at BNP Paribas in London.

“It’s probably going to take a little longer than they expected.” Oil almost doubled in New York between February and June as big names from Goldman and the International Energy Agency to new Saudi Energy Minister Khalid Al-Falih said declining U.S. oil production and disruptions from Nigeria to Canada were finally ending years of oversupply. Prices retreated to a three-month low near $41 a barrel this week amid a growing recognition the surplus will take time to clear. “There’s lots of crude and refined products around,” said David Fransen, Geneva-based head of Vitol SA, the biggest independent oil trader. “Demand growth has faltered a bit.”

Don’t worry, prices will come down.

• Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)

Wholesale gasoline in California became the cheapest in the country this week, but that change has largely gone unseen at the pump, where consumers are still paying the highest prices in the continental United States to fill up their cars. Ample inventories along with relatively stable refinery operations and imports has driven down the spot value of gasoline in Los Angeles at the wholesale level by more than 60 cents since mid-June. However, that has not translated to similarly lower retail fuel prices for consumers because of peculiarities in California’s market. The declines in the state’s retail gasoline market over that period of time have averaged less than 14 cents, according to data from the U.S. Energy Information Administration.

On Thursday, wholesale California gasoline was trading below $1.20 a gallon. The spread between California’s wholesale and retail gasoline markets was about $1.50 a gallon the week to July 25, about 40 cents wider than a similar spread in the New York market. California is one of the most expensive places in the United States to produce gasoline because of the state’s unique blending requirements and its relative isolation from the rest of the country, which makes securing crude oil to refine pricier. Gasoline prices across the country have plunged as crude has also slumped in the past two years, pressured by a global supply glut. On the West Coast, gasoline stocks are at a five-year seasonal high of 29.6 million barrels, according to the EIA.

Lots of reports due later today.

• In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)

It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline since profits peaked over a year ago. What’s more analysts, renowned for their Pollyannish expectations, can’t seem to find it, either. So I thought it might be interesting to look at what the stock market has done in the past during earnings recessions comparable to the current one. And it’s pretty eye-opening. Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market. In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial wellbeing.

Great idea. There should be one in Athens too.

• Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

Spain’s seaside city of Barcelona on Thursday unveiled a large digital counter that will track the number of refugees who die in the Mediterranean, next to one of its popular beaches. “We are inaugurating this shame counter which will update all known victims who drowned in the Mediterranean in real time,” said Mayor Ada Colau. The monument consists of a large metal rectangular pillar that comes decked out with a digital counter above the inscription “This isn’t just a number, these are people.”

The counter kicked off with 3,034 — the number of migrants and refugees who have died trying to cross the Mediterranean to Europe in 2016, according to the International Organization for Migration (IOM). “We’re here to look the Mediterranean in the face and look at this number — 3,034 people who drowned because they were not offered a safe passage,” said Colau, as swimmers took advantage of the last rays of sunshine nearby.

Barcelona’s mayor Ada Colau poses in front a digital billboard that shows the number of refugees who died in the Mediterranean sea, named “the shame counter” (AFP Photo/Josep Lago)

Debt Rattle July 28 2016

Jul 282016

July 28, 2016 Posted by Raúl Ilargi Meijer at 8:11 am Finance Tagged with: bailout, China, debt, emails, Hillary, Japan, phone, shadow banks, taxes, Trump, Turkey 6 Responses »

Marion Post Wolcott Main Street. Sheridan, Wyoming 1941

• Beijing’s Property Sales Surge 65% In 2015 (R.)

• How a Chinese Highway Became a Boulevard of Broken Dreams (WSJ)

• China Shadow Banking Assets Grew 30% In 2015 (R.)

• An Auction House Learns the Art of Shadow Banking (BBG)

• Japan’s Real Problem Is Too Much Debt (720G)

• Can the World Deal With a New Bank Crisis? (Satyajit Das)

• Wolfgang Schäuble Bails Out Spain, Portugal (Pol.)

• Households on the Hook for Italy’s Next Bailout (BBG)

• Buying Longer Bonds Holds Danger (WSJ)

• Trump Draws Ire After Urging Russia To Find ‘Missing’ Clinton Emails (R.)

• In Clash Of Billionaires, Bloomberg Calls Trump White House Race ‘A Con’ (R.)

• IRS Launches Investigation Of Clinton Foundation (DC)

• Turkey Shuts Down 45 Newspapers, 16 TV Stations (AP)

• Taxes On Apple’s Offshore Assets Would Cover Most Of US Education Budget (MW)

• The Slot Machine in Your Pocket (Spiegel)

Government blows bubble. Rinse and repeat.

• Beijing’s Property Sales Surge 65% In 2015 (R.)

Property sales in Beijing rose 64.8% in 2015, boosted by more favorable housing policies, according to a real estate white paper released by the city’s government. Increased government stimulus sparked a sharp reversal in the market after sales volumes fell 30% in 2014, the white paper said. The benchmark interest rate for housing loans also dropped to its lower level in almost a decade, after several interest rate cuts, the paper noted. “The country’s housing credit and tax policies have been at their most favorable levels in recent years,” the paper said.

The number of newly-built commercial homes and existing stock sold in Beijing increased 26% and 90.7% respectively year-on-year in 2015, according to the paper published by Beijing Municipal Commission of Housing and Urban-Rural Development. China reported slightly stronger-than-expected economic growth in the second quarter as the housing boom and a government infrastructure building spree boosted demand for materials from cement to steel. But recent data has also indicated that property investment growth is cooling. Some of the country’s biggest cities have had to impose curbs on property purchases as sharp price rises raise fears of possible asset bubbles.

This bubble is popping, though.

• How a Chinese Highway Became a Boulevard of Broken Dreams (WSJ)

A highway project here that is four years behind schedule and hundreds of millions of dollars over budget helps explain why Beijing s effort to raise infrastructure spending is an increasingly ineffective way to boost the economy. When construction on the Chang An Expressway began in 2008 it seemed a sure bet. Its private partners stood to collect decades of lucrative toll revenue. The economy and the environment would benefit by slashing three hours off a four-hour trip. But the project, in central Hunan province, has been beset by financial problems, resident protests and a corruption probe, issues that also have hindered hundreds of other projects in China.

Such setbacks are hurting Beijing s efforts to halt a decline in economic growth that is rippling across the globe and threatening political stability at home. China also is drawing less benefit from the infrastructure projects it completes. After a 15-year period in which the country built thousands of roads, airports, bridges and buildings, the economic benefit of adding even more is decidedly less valuable. Local governments’ heavy debt loads from prior stimulus efforts are further obstructing China’s efforts to stimulate the economy with infrastructure spending. More of their borrowed money is going to pay back previous loans. Many of these projects lose money, adding still more debt.

The upshot: China needed twice as much investment per unit of growth in 2015 as it did in 2010, official data show. This hasn’t stopped Beijing from doubling down on infrastructure spending as exports, manufacturing and other growth engines sputter. The government plans to spend $749 billion on transport projects over the next three years, compared with $171 billion worth built last year.

Crackdown? Only in name. China is addicted to the shadows.

• China Shadow Banking Assets Grew 30% In 2015 (R.)

Shadow banking activity in China has expanded further and now accounts for nearly a third of the total banking sector assets, raising financial risks in the world’s second-largest economy, rating agency Moody’s Investor Service said on Wednesday. Shadow banking assets in China increased by 30% last year, reaching almost 54 trillion yuan (6.17 trillion pounds), according to Moody’s estimates. That is equivalent to about 78% of China’s total economic output and 27.6% of its banking assets. In 2011, shadow banking products accounted for 17.2% of total banking assets, and the share grew to 24.3% in 2014. China’s crackdown on risky practices in the thinly regulated shadow banking system has taken on fresh urgency amid a growing number of corporate defaults, and as policymakers appear worried about the risks of relying on too much debt-fuelled stimulus.

Despite this, shadow banking’s share in bank loans and total bank assets has expanded rapidly, as sectors and firms reeling from overcapacity and poor credit profiles turn to other sources of funding, and investors hunt for higher yields. “The rise in overall leverage and further expansion of shadow banking activity are pushing up financial risks,” said the Moody’s report, adding the growth highlights “spillover risks” to the financial system due to its interconnectedness. Years of breakneck growth for China’s top insurers have been partly fuelled by a splurge on shadow banking-linked products that could punch multi-billion-dollar holes in their balance sheets, a Reuters analysis showed.

Mid-tier Chinese banks are also increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on balance sheets, masking the scale and risks of the slowing economy. The takeover tussle embroiling top Chinese developer China Vanke has also showed how local banks are increasingly exposed to highly volatile domestic stock markets through shadow lending products. “The increasing size of the shadow banking system means that during a disorderly contraction, banks could have difficulty replacing shadow banking credit, leaving borrowers who rely on such financing at risk of a credit crunch,” Moody’s said.

Shadow banking comes in many different guises.

• An Auction House Learns the Art of Shadow Banking (BBG)

A year before he got caught up in a U.S. money-laundering investigation, Malaysian financier Jho Low was looking to borrow more than $100 million without having to answer all the nosy know-your-customer questions required by U.S. banks such as JPMorgan Chase. “Prefer the boutique banks that can move fast vs the large ones like JPM,” Low wrote on March 13, 2014, to an employee of a private art dealership that had sold him a painting by Claude Monet for $35 million a few months earlier. The lender “can take all the art no problems,” he wrote the next day. “All in Geneva free port. Speed is the most important and one with a fairly quick and relaxed kyc process.”

Low got his money a month later, not from a bank but from Sotheby’s, an auction house that isn’t subject to the same money-laundering scrutiny by regulators. He pledged 17 works of art, valued between $191.6 million and $258.3 million, to secure a $107 million loan, according to a U.S. Justice Department complaint filed July 20 in an effort to seize more than $1 billion of assets allegedly siphoned from a Malaysian state fund. As prices for art skyrocketed, Sotheby’s and other firms have become shadow banks, making millions of dollars of legal loans outside the regulated financial system and raising concerns that such financing could facilitate money laundering. Sotheby’s tripled lending to $682 million over the four years ended in 2015.

Last year it almost doubled, to $1 billion, a revolving credit facility provided by banks including JPMorgan and HSBC that it can use to make loans. “One way to launder is to use art as a security for a loan,” said David Hall, who spent 10 years as a special prosecutor for the Federal Bureau of Investigation’s Art Crime Team and is now a partner at law firm Wiggin & Dana. Hall, who wouldn’t comment about Sotheby’s or the Low case, said the aim is to use ill-gotten funds to purchase assets that can be used as collateral for a loan. “The level of scrutiny you’ll receive from a bank is much higher than you will receive from an auction house.”

It’s everybody’s real problem, but even more so for Japan.

• Japan’s Real Problem Is Too Much Debt (720G)

The Japanese economy has been the poster child for economic malaise and bad fortune for so long that even the most radical policy responses no longer garner much attention. In fact, recent policy actions intended to weaken the Yen have resulted in significant appreciation of the yen against the currencies of Japan’s major trade partners, further crippling economic activity. The frustration of an appreciating currency coupled with deflation and zero economic growth has produced signs that what Japan has in store for the world falls squarely in to the category of “you ain’t seen nothin’ yet.” Assuming new fiscal and monetary policies will be similar to those enacted in the past is a big risk that should be contemplated by investors.

The Japanese economy has been fighting weak growth and deflationary forces for over 25 years. Japan’s equity market and real estate bubbles burst in the first week of 1990, presaging deflation and stagnant economic growth ever since. Despite countless monetary and fiscal efforts to combat these economic ailments, nothing seems to work. Any economist worth his salt has multiple reasons for the depth and breadth of these issues but very few get to the heart of the problem. The typical analysis suggests that weak growth in Japan is primarily being caused by weak demand. Over the last 25 years, insufficient demand, or a lack of consumption, has been addressed by increasingly incentivizing the population and the government to consume more by taking on additional debt.

That incentive is produced via lower interest rates. If demand really is the problem, however, then some version of these policies should have worked, but to date they have not. If the real problem, however, is too much debt, which at 255% of Japan’s GDP seems a reasonable assumption to us, then the misdiagnoses and resulting ill-designed policy response leads to even slower growth, more persistent deflationary pressures and exacerbates the original problem.

Not much choice.

• Can the World Deal With a New Bank Crisis? (Satyajit Das)

As Europe braces for the release of its bank stress tests on Friday, the world could be on the verge of another banking crisis. The signs are obvious to all. The World Bank estimates the ratio of non-performing loans to total gross loans in 2015 reached 4.3%. Before the 2009 global financial crisis, they stood at 4.2%. If anything, the problem is starker now than then: There are more than $3 trillion in stressed loan assets worldwide, compared to the roughly $1 trillion of U.S. subprime loans that triggered the 2009 crisis. European banks are saddled with $1.3 trillion in non-performing loans, nearly $400 billion of them in Italy. The IMF estimates that risky loans in China also total $1.3 trillion, although private forecasts are higher. India’s stressed loans top $150 billion.

Once again, banks in the US, Canada, UK, several European countries, Asia, Australia and New Zealand are heavily exposed to property markets, which are overvalued by historical measures. In addition, banks have significant exposure to the troubled resource sector: Lending to the energy sector alone totals around $3 trillion globally. Borrowers are struggling to service that debt in an environment of falling commodity prices, weak growth, overcapacity, rising borrowing costs and (in some cases) a weaker currency. To make matters worse, the world’s limp recovery since 2009 is intensifying loan stresses. In advanced economies, low growth and disinflation or deflation is making it harder for companies to pay off what they owe. Many European firms are suffering from a lack of global competitiveness, exacerbated by the effects of the single currency.

Greece should sue him over this.

• Wolfgang Schäuble Bails Out Spain, Portugal (Pol.)

Ahead of Wednesday’s meeting of the EU’s 27 commissioners, Spain and Portugal looked to be headed for the eurozone’s version of politically embarrassing fiscal purgatory. There was no question that the Iberian duo’s budget deficits were in blatant breach of the single currency zone’s rules. Momentum was growing for the Commission to impose, for the first time ever, a fine totaling in the millions of euros. Even Jean-Claude Juncker, the Commission chief, had seemingly changed his previously skeptical views on sanctions, pushing his colleagues in recent weeks to enforce the rules and shore up Brussels’ credibility on eurozone governance. Then salvation arrived from an unlikely source: Wolfgang Schäuble.

The German finance minister, curmudgeonly fiscal hawk and scourge of spendthrift southern Europeans, broke with public type in a concerted, last-minute campaign to stop the sanctions, according to people familiar with his actions. Over the past weeks and days, Schäuble worked the phones and used personal encounters, pressing commissioners on the fence, mostly from his own center-right political block, to cancel the threatened fine. The behind-the-scenes intervention was driven by political considerations particular to this moment that trumped Schäuble’s long-standing demands for the eurozone nations to keep their budgets in order and abide by commonly agreed rules.

[..] As the consensus grew against a fine, Juncker urged the participants to make clear to the outside world why Brussels ducked, once again, imposing sanctions on rule breakers. “We must not be more Catholic than the Pope, but please make it known that the Pope wanted a fine of zero,” Juncker said, speaking in French at the closed-door meeting, according to a source in the room.

And now Schäuble can save Italy too.

• Households on the Hook for Italy’s Next Bailout (BBG)

While the stability of Italy’s banks has been a front-burner issue for policy makers since the first tremors of the global financial crisis, the result of stress tests on Friday could usher in the final stage of solving their predicament. Retail investors own almost half of the most vulnerable securities, a legacy of banks using their customers as a piggy bank for cheap funding. UniCredit declined to comment on Imperatore’s recollection. The bank’s subordinated bonds available to retail investors trade close to par, indicating investors don’t expect to suffer losses. The bank is considering raising as much as €5 billion from shareholders and selling its entire stake in Poland’s Bank Pekao to raise capital, people familiar with the matter said on Wednesday.

At the zenith of the financial crisis, between July 2007 and June 2009, 80% of Italian banks’ bonds were sold to retail investors, according to regulator Consob. Through savers, banks funded themselves at a similar cost to the Italian government, whereas they gave professional money managers an extra%age point in debt interest, the 2010 report found. The channel of selling junior bonds to savers has virtually shut this year. So far in 2016, only one Italian bank, Mediobanca, has sold subordinated debt with an initial investment designed to attract small-scale investors – selling €200 million of junior bonds with a minimum denomination of €1,000. In the same period last year 10 banks sold €1.4 billion of notes with the same minimum subscription size.

Still, Italian savers held €31 billion of subordinated bank bonds as of October, more than double the €13 billion in the hands of foreign investors, according to the Bank of Italy. That translates to about €1,260 of the junior bank debt for every household in Italy. Banca Monte dei Paschi di Siena, which has more than €27 billion of toxic loans on its books and needs to be recapitalized, has about €5 billion of junior debt.

“..if yields merely rise back to where they started the year, it would be catastrophic for those who have chased longer duration. The 30-year Treasury would lose 14% of its value, while Japan’s 40-year would lose a quarter of its value..”

• Buying Longer Bonds Holds Danger (WSJ)

Investors in Japan’s 40-year bond have lost 24 years of coupon income in just three weeks as the rush into long-dated safe government paper went into sharp reverse. At one level, the 10% fall in the price of the longest-dated Japanese government bond is just a correction after this year’s extraordinary rally, which delivered returns of more than 50% before the pullback. At another, it highlights something dangerous at work in today’s markets: the scale of the risks investors are willing to take as they try to avoid anything that depends on economic growth. Japan’s bond selloff was worse than other markets’, as investors prepared for next week’s ¥28 trillion ($268 billion) spending and tax-cut package and a possible further Bank of Japan stimulus this Friday.

U.S., U.K. and German bond prices have also dropped since early July, though by less, as global demand weakened for long-duration assets. The demand for safe assets with a long duration—a proxy for how long it takes an investor to get his money back—was mirrored in stocks and corporate bonds. Rather than search out the highest-yielding assets, investors looked for those with secure yield, even if it was lower. So this year, triple-A-rated corporate bonds have outperformed double-A or single-A bonds, according to Barclays data. The same applied for junk bonds, with the higher ratings outperforming lower ones. (An exception was bonds close to or already in default, which were mainly energy companies and so were boosted by the rising oil price.)

[..] if yields merely rise back to where they started the year, it would be catastrophic for those who have chased longer duration. The 30-year Treasury would lose 14% of its value, while Japan’s 40-year would lose a quarter of its value, equal to 63 years of coupons. Has the long-run economic outlook really changed so much since January?

Excuse me? That post is already taken: “..The Clinton campaign shot back that Trump was posing a possible national security threat..”

• Trump Draws Ire After Urging Russia To Find ‘Missing’ Clinton Emails (R.)

Republican Donald Trump on Wednesday invited Russia to dig up tens of thousands of “missing” emails from Hillary Clinton’s time at the U.S. State Department, vexing intelligence experts and prompting Democrats to accuse him of urging foreigners to spy on Americans. “Russia, if you’re listening, I hope you’re able to find the 30,000 emails that are missing,” Trump, the Republican presidential nominee, told reporters. Trump made the remark at a testy news conference at his Doral golf resort in Florida that allowed him to steal some of the limelight from the Philadelphia convention where Clinton on Thursday will accept the Democratic presidential nomination for the Nov. 8 election.

The Clinton campaign shot back that Trump was posing a possible national security threat by encouraging a foreign power to conduct espionage in the United States. Some intelligence experts said the comments raised questions about Trump’s judgment. A spokesman for Trump, Jason Miller, tried to tamp down the storm of protest, saying Trump did not urge Russia to hack Clinton’s emails. Trump said on Twitter that if anyone had Clinton’s emails, “perhaps they should share them with the FBI!” The criticism of Trump’s comments reverberated at the Democratic National Convention where speakers brought up the episode to try to intensify Democratic support for Clinton, who is running neck and neck with Trump in the polls.

“Donald Trump today once again took Russia’s side. He asked the Russians to interfere in American politics,” longtime Clinton supporter and former CIA Director Leon Panetta said. “Donald Trump … is asking one of our adversaries to engage in hacking or intelligence efforts against the United States of America to affect the election.” Another speaker, retired U.S. Rear Admiral John Hutson, said of Trump: “This morning, he personally invited Russia to hack us. That’s not law and order, that’s criminal intent.”

You ain’t helping, Mikey…

• In Clash Of Billionaires, Bloomberg Calls Trump White House Race ‘A Con’ (R.)

New York media mogul Michael Bloomberg assailed fellow billionaire Donald Trump on Wednesday, calling his U.S. presidential race a “con” and ripping into his history of bankruptcies and lawsuits. “Trump says he wants to run the nation like he’s running his business? God help us,” Bloomberg told the Democratic National Convention in Philadelphia to roaring applause. “I’m a New Yorker and I know a con when I see one.” Formerly a Republican and now an independent, Bloomberg was for the most part greeted warmly by the audience in the Wells Fargo Center arena where he threw his support behind the Democrats’ presidential nominee, Hillary Clinton.

The owner of the Bloomberg media empire and a former New York City mayor, Bloomberg was an odd choice for a speaker at the Democratic conclave, where many party progressives have railed against the influence of billionaires in politics. “Let me thank all of you for welcoming an outsider here, to deliver what will be an unconventional convention speech,” he said when he took the stage, eliciting cheers. “I am not here as a member of any party. I am here for one reason: to explain why I believe it is imperative that we elect Hillary Clinton as the next president of the United States.” Bloomberg had considered running for the White House as an independent this year but dropped the idea in March, saying it could increase the chances Trump would win.

Bloomberg has known Trump casually for years and twice appeared on Trump’s reality TV show “The Apprentice.” But since Trump entered the race for president in June 2015, Bloomberg has taken issue with him, lashing out at his policies and fiery rhetoric, especially his call to ban Muslims from entering the country and his promise to wall off the Mexican border and deport millions of undocumented foreigners.

If they can get the FBI to stop, what good would the IRS be?

• IRS Launches Investigation Of Clinton Foundation (DC)

IRS Commissioner John Koskinen referred congressional charges of corrupt Clinton Foundation “pay-to-play” activities to his tax agency’s exempt operations office for investigation, The Daily Caller News Foundation has learned. The request to investigate the Bill, Hillary and Chelsea Clinton Foundation on charges of “public corruption” was made in a July 15 letter by 64 House Republicans to the IRS, FBI and Federal Trade Commission (FTC). They charged the foundation is “lawless.” The initiative is being led by Rep. Marsha Blackburn, a Tennessee Republican who serves as the vice chairwoman of the House Committee on Energy and Commerce, which oversees FTC. The FTC regulates public charities alongside the IRS.

The lawmakers charged the Clinton Foundation is a “lawless ‘pay-to-play’ enterprise that has been operating under a cloak of philanthropy for years and should be investigated.” Koskinen’s July 22 reply came only a week after the House Republicans contacted the tax agency. It arrived to their offices Monday, the first opening day of the Democratic National Convention in Philadelphia. “We have forwarded the information you have submitted to our Exempt Organizations Program in Dallas,” Koskinen told the Republicans. The Exempt Organization Program is the division of the IRS that regulates the operations of public foundations and charities.

It’s the same division that was led by former IRS official Lois Lerner when hundreds of conservative, evangelical and tea party non-profit applicants were illegally targeted and harassed by tax officials. Blackburn told TheDCNF she believes the IRS has a double standard because, “they would go after conservative groups and religious groups and organizations, but they wouldn’t be looking at the Clinton Foundation for years. It was as if they choose who they are going to audit and question. It’s not right.” Blackburn said she and her colleagues will “continue to push” for answers on the Clinton Foundation’s governing policies, including its insular board of directors. She said they also will examine conflicts of interest and “follow the money trail.”

No schools, no papers, no TV. How does that country run?

• Turkey Shuts Down 45 Newspapers, 16 TV Stations (AP)

Turkey’s state run news agency says close to 1,700 officers have been formally discharged from the military following the country’s failed coup. Anadolu Agency also says the government has decided to close down dozens of media organizations, including 45 newspapers and 16 television stations. The government says a U.S.-based Muslim cleric is behind the failed uprising by a faction within the military that led to some 290 deaths on July 15. Thousands have been detained for suspected links to the coup, including Calgary’s Davud Hanci, an imam for the Correctional Service Canada and the Alberta correctional services who went to Turkey with his family on July 7 to visit his ailing father.

Hanci was detained and accused of working for U.S.-based cleric Fethullah Gulen, who Turkey alleges orchestrated the failed July 15 military coup. Gulen has repeatedly denied the claims. Hanci’s friends and family say he is innocent and they fear for his safety. Tens of thousands in Turkey have also been purged from state institutions. Earlier, authorities issued warrants for the detention of 47 former executives or senior journalists of Turkey’s Zaman newspaper for alleged links to Gulen. Such detentions have raised concerns that people could be targeted simply for criticizing the government. The media watchdog Reporters Without Borders condemned Turkey’s purges of journalists, saying they have assumed “increasingly alarming proportions.”

“Apple and its massive $181.1 billion overseas stash, a $70 billion increase from the prior year.”

• Taxes On Apple’s Offshore Assets Would Cover Most Of US Education Budget (MW)

The amount of money stashed overseas by U.S. multinationals has exploded in recent years, doubling between 2008 and 2014 to more than $2 trillion. For some perspective on the numbers, cost-estimating website HowMuch.net crunched the most recent data and created a telling interactive chart. Topping the list: Apple and its massive $181.1 billion overseas stash, a $70 billion increase from the prior year.

That total corresponds to $59.2 billion in deferred taxes, which is enough to cover more than two-thirds of the federal budget for education, training and employment, according to the 2014 numbers compiled by Citizens for Tax Justice last October. Elsewhere, General Electric’s taxes could take care of almost 5% of our Social Security costs, while taxes from Microsoft had it kept its money in the U.S., could have covered a fifth of all federal spending on veteran’s benefits. According to estimates, the prevalence of offshore tax havens causes the U.S. to lose out on $90 billion in federal income taxes each year. That’s no small chunk.

“The average person checks their phone 150 times a day. Why do we do this? Are we making 150 conscious choices?”

• The Slot Machine in Your Pocket (Spiegel)

When we get sucked into our smartphones or distracted, we think it’s just an accident and our responsibility. But it’s not. It’s also because smartphones and apps hijack our innate psychological biases and vulnerabilities. I learned about our minds’ vulnerabilities when I was a magician. Magicians start by looking for blind spots, vulnerabilities and biases of people’s minds, so they can influence what people do without them even realizing it. Once you know how to push people’s buttons, you can play them like a piano. And this is exactly what technology does to your mind. App designers play your psychological vulnerabilities in the race to grab your attention. I want to show you how they do it, and offer hope that we have an opportunity to demand a different future from technology companies.

If you’re an app, how do you keep people hooked? Turn yourself into a slot machine. The average person checks their phone 150 times a day. Why do we do this? Are we making 150 conscious choices? One major reason why is the number one psychological ingredient in slot machines: intermittent variable rewards. If you want to maximize addictiveness, all tech designers need to do is link a user’s action (like pulling a lever) with a variable reward. You pull a lever and immediately receive either an enticing reward (a match, a prize!) or nothing. Addictiveness is maximized when the rate of reward is most variable.

Does this effect really work on people? Yes. Slot machines make more money in the United States than baseball, movies, and theme parks combined. Relative to other kinds of gambling, people get “problematically involved” with slot machines three to four times faster according to New York University professor Natasha Dow Schüll, author of “Addiction by Design.”

Deflation Is Blowing In On An Eastern Trade Wind

Jul 022016

July 2, 2016 Posted by Raúl Ilargi Meijer at 4:38 pm Finance Tagged with: China, deflation, devaluation, Japan, money supply, monopoly money, spending, velocity, yen, yuan 1 Response »

Jack Delano “Lower Manhattan seen from the S.S. Coamo leaving New York.” 1941

Brexit is nowhere near the biggest challenge to western economies. And not just because it has devolved into a two-bit theater piece. Though we should not forget the value of that development: it lays bare the real Albion and the power hunger of its supposed leaders. From xenophobia and racism on the streets, to back-stabbing in dimly lit smoky backrooms, there’s not a states(wo)man in sight, and none will be forthcoming. Only sell-outs need apply.

The only person with an ounce of integrity left is Jeremy Corbyn, but his Labour party is dead, which is why he must fight off an entire horde of zombies. Unless Corbyn leaves labour and starts Podemos UK, he’s gone too. The current infighting on both the left and right means there is a unique window for something new, but Brits love what they think are their traditions, plus Corbyn has been Labour all his life, and he just won’t see it.

The main threat inside the EU isn’t Brexit either. It’s Italy. Whose banks sit on over 30% of all eurozone non-performing loans, while its GDP is about 10% of EU GDP. How they would defend it I don’t know, they’re probably counting on not having to, but Juncker and Tusk’s European Commission has apparently approved a scheme worth €150 billion that will allow these banks to issue quasi-sovereign bonds when they come under attack. An attack that is now even more guaranteed to occcur than before.

Still, none of Europe’s internal affairs have anything on what’s coming in from the east. Reading between the lines of Japan’s Tankan survey numbers there is only one possible conclusion: the ongoing and ever more costly utter failure of Abenomics continues unabated.

It’s developing in pretty much the exact way I said it would when Shinzo Abe first announced the policies in late 2012. Not that it was such a brilliant insight, all you had to know is that Abe and his central bank head Kuroda don’t understand what their mastodont problem, deflation, actually is, and that means they are powerless to solve it.

That Abe said somewhere along the way that all that was needed was his people’s confidence to make Abenomics work, says more than enough. The multiple flip-flops over a sales-tax increase say the rest. People don’t become more confident just because someone tells them to; that has the opposite effect. Deflation results from reduced spending, which in turn comes from not only decreasing confidence as well as a decrease in money people have available to spend.

That modern economics sees everything not spent as ‘savings’ adds significantly to the failure -on the part of Abe, Kuroda and just about everyone else- to understand what happened in Japan over the past 2-3 decades. To repeat once again, inflation/deflation is the velocity of money multiplied by money- and credit supply. The latter factor has in general gone through the roof, but that means zilch if the former -velocity- tanks.

That this velocity is -still- tanking, in Japan as well as in the western world, is due to, more than anything else, an unparalleled surge in debt. At some point, that will catch up with any economy and society. Even if they are growing, which our economies are not. Growth has been replaced with credit, and credit is debt. It’s safe to say that money velocity cannot possibly ‘recover’ until large swaths of debt have been cancelled, one way or another.

For Japan we saw this week that “..household spending fell for the third straight month in May and core consumer prices suffered their biggest annual drop since 2013..” (Reuters) while “..The Topix index dropped about 9% in June, plunging on June 24 with the Brexit vote, the most since the aftermath of the 2011 earthquake. The yen strengthened about 8% against the dollar in June..“ (Bloomberg).

Japan has an upper-house election in a little over a week, and it seems like Abe can still feel comfortable about his position. A remarkable thing. The country needs to stop digging, it’s in a more than 400% debt-to-GDP hole, but Abe won’t listen. The rising yen is suffocating what is left of the economy, as are the negative interest rates, but all the talk is about ‘further easing’.

Still, Japan is outta here, and this has been obvious for a long time to the more observant observer. In the case of China, it is a more recent phenomenon, and it will even be disputed for a while to come. It’s also one that will have a much more devastating effect on the west. We’ve seen problems in various markets in Singapore, Macau and Hong Kong, but the real issues on the mainland are still to be sprung on us.

Mainland stock exchanges are as good a place as any to begin with. The combined tally for Shanghai and Shenzhen looks like this -data till June 23-; yes, that’s a loss of over 40% in the past year.

Beijing has been trying very hard to paper over these numbers, even quit supporting it all for a while through 2014, only to do a 180º when they didn’t like what they saw (foreign reserves drawdown), and now PBoC injections have gone bonkers: $316 billion in one month would mean $4 trillion on a yearly basis in what is really nothing but monopoly money.

Meanwhile, corporate bonds are, perhaps partly because of volatility, becoming an endangered species. Maybe the PBoC can do something there as well, the way Draghi does in Europe (must be high on the agenda), but there’s already so much bad debt we hardly dare watch.

China must and will try to keep boosting exports by devaluing the yuan. It’s just waiting for an opportunity to do it without being accused of currency manipulation. Perhaps it can create that opportunity?! Create a crisis and then use it?! Regardless, this Reuters headline yesterday sounded very tongue in cheek:

China To ‘Tolerate’ Weaker Yuan

China’s central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5%, policy sources said. The yuan is already trading at its lowest level in more than five years, so the central bank would ensure any decline is gradual for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions. Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.

Note: remember Japan above? The yen rose 8% against the USD just in June, as the yuan fell by just 4.5% in all of 2015 (6.8% over the past 2 years). Now you go figure what’s happening to Japan-China trade. And the yuan is still hugely overvalued. But the desire to be part of the IMF basket of currencies comes with obligations. Trump doesn’t help either.

I said in the beginning of this year that a 30% devaluation was something of a minimum, and that certainly continues to stand. So yeah, creating a crisis may be the only way out. An accident in the South China Sea perhaps. Combined with a ‘tolerance’ for a 50% weaker yuan….

All of the above leads us to the title of this essay: deflation is coming in from the east. China’s economy’s already in deflation, even though it will take some time yet to be acknowledged. A very ‘nice’ report from Crescat Capital provides a bunch of clues.

China QE Dwarfs Japan and EU

In July of 2014, we wrote about the huge imbalance with respect to China’s M2 money supply and nominal GDP relative to the US. At the time, China’s M2 money supply was 71% higher than the US but its economy was 56% smaller, which we said was an indication of the overvaluation of the Chinese currency. Since that time, the yuan has fallen by only 6.8% relative to the dollar. We haven’t seen anything yet.

Today, the circumstances have significantly worsened. Money supply has continued to grow faster than GDP. With over $30 trillion of assets in its banking system and an underappreciated non-performing loan problem, we are convinced that China is headed for a twin banking and currency crisis. Money velocity has reached historically low levels which reflects China’s extreme credit imbalance and its crimping impact on its ability to generate future real GDP growth.

Just as worrying as the immense amount of credit built up, China has been reporting major downward revisions in its balance of payments (BoP) accounts. For more than a decade, China had been reporting an impossible twin surplus in its BoP accounts. When we wrote about this issue in 2014, we emphasized the likelihood of massive illicit capital outflows that not been accounted for. At that time, according to the State Administration of Foreign Exchange of China (SAFE), China had accumulated a BoP imbalance that was close to $9.4 trillion surplus since 2000 which we believed represented capital outflows that should have been recorded in the capital account.

The same accumulated BoP number today, revised by SAFE several times since, is now a deficit of about $2.8 trillion. Essentially, with its revisions, the SAFE has acknowledged even more capital outflows over the last 16 years than we had initially identified. On the capital account side, there was a downward revision of $10.1 trillion – from a $4.2 trillion surplus to a $5.9 trillion deficit. On the current account side, the revisions show that Chinese exports have not been as strong as initially reported over the last decade and a half. China’s current account surplus has been reduced by $2.1 trillion– going from $5.1 trillion to $2.9 trillion over the last 16 years. What we initially considered to be a $9.4 trillion imbalance has been more than proven by a $12.2 trillion revision.

Those are some pretty damning numbers, if you sit on them for a bit. There was another graph that came with that report that takes us head first into deflationary territory. China’s velocity of money:

That is utterly devastating. It’s what we see in the US, EU and Japan too, but ‘we’ have thus far been able to export our deflation -to an extent- to … China. No more. China has started exporting its own deflation to the west. Beijing MUST devalue its currency anywhere in the range of 30-50% or its export sector will collapse. It is not difficult.

That it will have to achieve this despite the objections of Donald Trump and the IMF is just a minor pain; Xi Jinping has more pressing matters on his mind. Like pitchforks.

The ‘normal’ response in economics would be: in order to fight deflation, increase consumer spending (aka raise money velocity)! But as we’ve seen with Japan, that’s much easier said than done. Because there are reasons people are not spending. And the only way to overcome that is to guarantee them a good income for a solid time into the future, in an economy that induces confidence.

That is not happening in Japan, or the US or EU, and it’s now gone in China too. Beijing has another additional issue that (formerly) rich countries don’t have. This is from a recent Marketwatch article on Andy Xie:

China Is Headed For A 1929-Style Depression

[..] Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash. China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market – indicating that conditions are ripe for a correction. “The government is allowing speculation by providing cheap financing .. China “is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.”

And then check this out:

China’s GDP grew 6.9% in 2015, its slowest pace in a quarter-century. For 2016, Beijing has set a GDP target of 6.5% to 7%; The latest spate of global uncertainties prompted Bank of America Merrill Lynch and Deutsche Bank to trim their forecasts to 6.4% and 6.6%, respectively. The export sector, long a driver of Chinese growth, is sputtering due to global saturation and household consumption is barely 30% of China’s GDP, Xie said. In the U.S., household consumption accounted for more than 68% of GDP in 2014, according to the World Bank.

Yeah, China is supposed to be going from an export driven- to a consumer driven economy. Problem with that seems to be that those consumers would need money to spend, and to earn that money they would need to work in export industries (since there is not nearly enough domestic demand). Bit of a Catch 22. And definitely not one you would want to find yourself in when the global economy is tanking.

The more monopoly money Beijing prints, the more pressure there will be on the yuan. And if they themselves don’t devalue the yuan, the markets will do it for them.

Kyle Bass says China’s $3 trillion corporate bond market is “freezing up” (see the third graph above), which threatens to undermine the $3.5 trillion market for the wealth management products Chinese mom and pops invest in. He expects a whopping $3 trillion in bank losses, an amount equal to the entire corporate bond market (!) “to trigger a bailout, with the central bank slashing reserve requirements, cutting the deposit rate to zero and expanding its balance sheet – all of which will weigh on the yuan.”

With the yuan down by as much as it would seem to be on course for, wages and prices in the west will plummet. This wave of deflation is set to hit western economies already in deflation and already drowning in private debt, and therefore equipped with severely weakened defenses.

Leonard Cohen once wrote a song called “Democracy Is Coming To The USA”. Maybe someone can do a version that says deflation is coming too. Not sure that’s good for democracy, though.

Have a great Holiday Weekend.

Debt Rattle July 1 2016

Jul 012016

July 1, 2016 Posted by Raúl Ilargi Meijer at 9:26 am Finance Tagged with: bonds, Canada, China, deflation, Italy, Japan, jet stream, price discovery, refugees 2 Responses »

Harris&Ewing Oil for salads 1918

• Japan Deflation Intensifies (R.)

• Japan’s Prices Keep Falling in Challenge to Abe, Kuroda (BBG)

• China QE Dwarfs Japan and EU (VW)

• China To ‘Tolerate’ Weaker Yuan (R.)

• China Is Headed For A 1929-Style Depression: Andy Xie (MW)

• Asian Factories Struggle, Brexit Throws Up New Threats (R.)

• Europe Post-Brexit (Brad Setser)

• EU Approves Italian Contingency Plan To Guarantee Bank Liquidity (R.)

• The Italian Job (DDMB)

• Standard & Poor’s Cuts EU Credit Rating (G.)

• Price Discovery, RIP (David Stockman)

• Scientists Warn Of ‘Global Climate Emergency’ Over Jet Stream Shift (Ind.)

• Refugees Encounter a Foreign Word: Welcome (NY Times)

Abenomics and BOJ stimulus are dismal failures. So what to do? Moar of the same of course. How much longer can Abe remain in power?

• Japan Deflation Intensifies (R.)

Japanese manufacturers’ confidence was subdued in June and service-sector sentiment deteriorated from three months ago on weak consumption, a central bank survey showed, in discouraging signs for a fragile economy grappling with a strong yen and slack overseas demand. The results of the survey could have been much worse had it captured the gloom from Britain’s vote last week to leave the EU, which spread turmoil in financial markets and put pressure on the Bank of Japan to expand its stimulus later this month. Separate data on Friday showed household spending fell for the third straight month in May and core consumer prices suffered their biggest annual drop since 2013, keeping policymakers under pressure to do more to spur growth.

“Worsening sentiment for non-manufacturers represents weak demand. This gives the government an incentive to increase stimulus spending,” said Daiju Aoki at UBS Securities. “If the government announces the size of stimulus spending shortly after the upper house election next week, the BOJ could ease policy at the end of the month,” he said. The BOJ’s closely-watched quarterly tankan survey showed the headline index for big manufacturers’ sentiment stood at plus 6, unchanged from three months ago and better than a median market forecast of plus 4. Big non-manufacturers’ sentiment index worsened to plus 19 from plus 22, the survey showed, as retailers felt the pain from weak domestic consumption and a slowdown in spending among overseas tourists.

“The yen strengthened about 8% against the dollar in June.”

• Japan’s Prices Keep Falling in Challenge to Abe, Kuroda (BBG)

With a little more than a week until Japan goes to the polls for an upper-house election, a batch of economic data released Friday underscores the challenge Prime Minister Shinzo Abe faces in convincing voters that his policies are working. Consumer prices excluding fresh food fell for a third straight month and household spending declined, undermining efforts to revitalize the world’s third-largest economy. While corporate confidence and unemployment were unchanged, there is still little pressure for higher wages. Friday’s data followed reports earlier this week showing that industrial production fell more than economists had forecast and retail sales were flat in May, adding to concern that Japan’s recovery may be faltering after the economy returned to growth in the first quarter.

The U.K.’s vote to leave the European Union has strengthened the yen and roiled financial markets, increasing risks to corporate earnings for Japanese companies. The data will put more pressure on Bank of Japan Governor Haruhiko Kuroda to expand monetary stimulus at the policy meeting later this month, especially with the stronger yen and the central bank far from its 2% inflation target. “Given concerns over the effects of the Brexit vote and the strengthening yen, there is a high chance that the BOJ will ease further at its July meeting,” said Hiroaki Muto at Tokai Tokyo Research Center. “If the BOJ doesn’t move this time, there’s a possibility that the yen will strengthen further.” The Topix index dropped about 9% in June, plunging on June 24 with the Brexit vote, the most since the aftermath of the 2011 earthquake. The yen strengthened about 8% against the dollar in June.

Chinese deflation.

• China QE Dwarfs Japan and EU (VW)

In July of 2014, we wrote about the huge imbalance with respect to China’s M2 money supply and nominal GDP relative to the US. At the time, China’s M2 money supply was 71% higher than the US but its economy was 56% smaller, which we said was an indication of the overvaluation of the Chinese currency. Since that time, the yuan has fallen by only 6.8% relative to the dollar. We haven’t seen anything yet. Today, the circumstances have significantly worsened. Money supply has continued to grow faster than GDP. With over $30 trillion of assets in its banking system and an underappreciated non-performing loan problem, we are convinced that China is headed for a twin banking and currency crisis. Money velocity has reached historically low levels which reflects China’s extreme credit imbalance and its crimping impact on its ability to generate future real GDP growth.

Just as worrying as the immense amount of credit built up, China has been reporting major downward revisions in its balance of payments (BoP) accounts. For more than a decade, China had been reporting an impossible twin surplus in its BoP accounts. When we wrote about this issue in 2014, we emphasized the likelihood of massive illicit capital outflows that not been accounted for. At that time, according to the State Administration of Foreign Exchange of China (SAFE), China had accumulated a BoP imbalance that was close to $9.4 trillion surplus since 2000 which we believed represented capital outflows that should have been recorded in the capital account.

The same accumulated BoP number today, revised by SAFE several times since, is now a deficit of about $2.8 trillion. Essentially, with its revisions, the SAFE has acknowledged even more capital outflows over the last 16 years than we had initially identified. On the capital account side, there was a downward revision of $10.1 trillion – from a $4.2 trillion surplus to a $5.9 trillion deficit. On the current account side, the revisions show that Chinese exports have not been as strong as initially reported over the last decade and a half. China’s current account surplus has been reduced by $2.1 trillion– going from $5.1 trillion to $2.9 trillion over the last 16 years. What we initially considered to be a $9.4 trillion imbalance has been more than proven by a $12.2 trillion revision.

Cryptic fun.

• China To ‘Tolerate’ Weaker Yuan (R.)

China’s central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5%, policy sources said. The yuan is already trading at its lowest level in more than five years, so the central bank would ensure any decline is gradual for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions. Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.

The economists and advisers are not directly briefed on policy by the People’s Bank of China (PBOC), but they have regular meetings and interactions with central bank officials and they provide policy recommendations. They said the central bank would tolerate a further weakening of the yuan this year to between 6.7-6.8 per dollar. “The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter. “The Brexit vote was a big shock. The market volatility may last for some time.”

Good read.

• China Is Headed For A 1929-Style Depression: Andy Xie (MW)

Andy Xie isn’t known for tepid opinions. The provocative Xie, who was a top economist at the World Bank and Morgan Stanley, found notoriety a decade ago when he left the Wall Street bank after a controversial internal report went public. Today, he is among the loudest voices warning of an inevitable implosion in China, the world’s second-largest economy. Xie, now working independently and based in Shanghai, says the coming collapse won’t be like the Asian currency crisis of 1997 or the U.S. financial meltdown of 2008. In a recent interview with MarketWatch, Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash.

China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market — indicating that conditions are ripe for a correction. “The government is allowing speculation by providing cheap financing,” Xie told MarketWatch. China “is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.” Xie’s viewpoints have at times attracted unwelcome attention. In 2006, when he was a star Asia economist at Morgan Stanley a leaked email to colleagues in which he said money laundering was bolstering growth in Singapore led to his abrupt departure from the bank. In early 2007, he termed China’s surging markets a “bubble” that could lead to a banking crisis,” and in 2009 he likened them to a “Ponzi scheme.”

“Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher.”

• Asian Factories Struggle, Brexit Throws Up New Threats (R.)

China’s vast factory sector flatlined in June as exports shrank and jobs were cut, a worrying trend evident across Asia that argues for yet more policy stimulus as doubts gather over the potency of measures taken so far. The hard times signaled by a range of surveys was not what the world needed a week after Britain’s vote to leave the European Union condemned that bloc to months, if not years, of political and economic instability. Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher. “The unimaginable has happened and the UK vote will cast a long shadow over the UK, Europe and global markets for some time to come,” warned Westpac head currency strategist Robert Rennie.

“A structurally weaker pound, a softer euro and weaker global growth beckons.” Among the many surveys out on Friday, China’s official Purchasing Managers’ Index (PMI) slipped a tick to 50 in June, dead on the level that is supposed to separate growth from contraction. One saving grace was the services sector measure, which nudged up to 53.7 in a positive sign for consumer activity. More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four-month trough of 48.6 in June, from 49.2 in May.

“..the euro area’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand..”

• Europe Post-Brexit (Brad Setser)

A few thoughts, focusing on narrow issues of macroeconomic management rather than the bigger political issues. The U.K. has been running a sizeable current account deficit for some time now, thanks to an unusually low national savings rate. That means, on net, it has been supplying the rest of Europe with demand—something other European countries need. This isn’t likely to provide Britain the negotiating leverage the Brexiters claimed (the other European countries fear the precedent more than the loss of demand) but it will shape the economic fallout. The fall in the pound is a necessary part of the U.K.’s adjustment. It will spread the pain from a downturn in British demand to the rest of the euro area.

Brexit uncertainty is thus a sizable negative shock to growth in Britian’s euro area trading partners not just to Britain itself: relative to the pre-Brexit referendum baseline, I would guess that Brexit uncertainty will knock a cumulative half a%age point off euro area growth over the next two years.* Of course, the euro area, which runs a significant current account surplus and can borrow at low nominal rates, has fiscal capacity to counteract this shock. Germany is being paid to borrow for ten years, and the average ten year rate for the euro area as a whole is around 1%. The euro area could provide a fiscal offset, whether jointly, through new euro area investment funds or simply through a shift in say German policy on public investment and other adjustments to national policy.

I say this knowing full-well the political constraints to fiscal action. The Germans do not want to run a deficit. The Dutch are committed to bringing an already low deficit down further. France, Italy and especially Spain face pressure from the Commission to tighten policy. The Juncker plan never really created the capacity for shared funding of investment. The euro area’s aggregate fiscal stance is, more or less, the sum of national fiscal policies of the biggest euro area economies. If I had to bet, I would bet that the euro area’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand. A lot depends on the fiscal path Spain negotiates once it forms a new government, given that is running the largest fiscal deficit of the euro area’s big five economies.

€150 billion. Chump change. Wait, there was a eurozone debt crisis in 2011?

Italy’s banks can now issue bonds with the same guarantee sovereign bonds have. But only the solvent ones, as in: those who don’t need it.

This is worse than a band-aid. Just wait till the vultures wake up.

• EU Approves Italian Contingency Plan To Guarantee Bank Liquidity (R.)

The European Commission has authorized an Italian government plan to guarantee liquidity for banks in the event of a financial crisis in the euro zone’s third-largest economy, an EU executive spokeswoman said on Thursday. The Commission approved the scheme last Sunday, another EU official said, days after Britain voted to leave the EU, triggering a sell-off in European bank stocks, especially in Italy, home to roughly a third of the euro zone’s bad debts. The scheme, worth up to €150 billion according to some media reports, would only be triggered in circumstances similar to the euro zone debt crisis of 2011, when some banks in the currency bloc needed to be bailed out and the interbank market had ceased to function. “Given the financial markets turmoil of recent days, the government saw it fit to prepare for all scenarios, even the most improbable, to be ready to step in to protect savers,” the Italian Treasury said in a statement.

Italian officials stressed they did not expect Italy to suffer a 2011-style meltdown in confidence but said it was prudent to plan for a worst-case scenario. Italian bank shares ended up 2% on Thursday after news of the scheme. Under the scheme, a bank can ask the government to guarantee its bond issues, ensuring that it can raise money even in troubled markets, but it only applies until the end of this year and only to banks with solvent balance sheets. “In this way, they can issue bonds that, with the assistance of the public guarantee, are similar to an Italian government bond,” said one source familiar with the scheme. [..] Rome has said it is concerned that Italian banks, which hold €360 billion of bad loans, risk attack by hedge funds betting that market turmoil, increased by last week’s Brexit vote, could tip them into a full-blown crisis.

How Germany is blowing up the very EU that is making it rich.

• The Italian Job (DDMB)

More than any of its peers, the Italian economy has suffered since joining the euro in 1999. Since 2007, its economy has contracted by 10% and suffered not one, not two, but three recessions. Competitive export-led growth has been deeply impaired by virtue of Italy’s being effectively yoked to the massive German economy. Despite the rise of China, Germany has been able to maintain its top three ranking among world exporters. The secret weapon? That would be the euro. In 1998, the year before Germany switched to the euro, the country exported $540 billion. By 2015, that figure had swelled to $1.3 trillion. Italy’s exports have also grown, but not nearly as robustly, coming in last year at $459 billion compared to $242 billion the year before it joined the euro.

Just as it once was the case with China, Germany benefits from its relatively weak currency. If Germany was not tethered to its weaker-economy neighbors and was still on the Deutsche Mark, it would have a significantly stronger currency and substantially lower exports due to the price of its exports being much more expensive for world markets. Back in 2011, UBS put pencil to paper and figured that losing the common currency would trigger an immediate effective tax increase for the average German citizen of about €7,000 and between €3,500 to €4,000 every single year going forward. By contrast, swallowing half the debt of Greece, Ireland and Portugal at that time would have generated a little over €1,000 tab per citizen.

Now you see why bailing out is so easy to do, though the Germans do put on a great show of irritation at having to foot such bills. But let’s be honest. Consider the alternative. Reverse that effect and, with all else being equal, you begin to appreciate why Italy’s exports have become relatively more expensive, burdened as they are with a more expensive currency than they would have had. Consider that globalization had already done a number on the country’s once magnificent industrial base when Italy opted into the euro and left the lire behind. Since then, the country’s industrial capacity has been further decimated, shrinking by 15%. To take but one example, in 2007, Italy manufactured 24 million appliances; by 2012 it had declined to 13 million.

S&P doesn’t mind doing useless things.

• Standard & Poor’s Cuts EU Credit Rating (G.)

The European Union has suffered a downgrade of its long-term credit rating following the UK’s Brexit vote last week. In a move that will increase the borrowing costs for the 28-member bloc, the credit ratings agency S&P said the EU should see its status as a safe haven for investors reduced to AA from AA+. The agency said: “After the decision by the UK electorate to leave the EU … we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor.” International investors use credit agency reports to gauge the safety of their funds and the likelihood that their investments will become insolvent. Pension funds and other investors typically move their money to safe havens in times of uncertainty.

But concerns that the ripple effects of the Brexit vote will hit the profits of corporations in Europe, the US and Japan and hurt government finances have grown in recent days. Earlier this week S&P became the last of the three major ratings agencies to strip the UK of its last AAA rating as it warned that the economic, fiscal and constitutional risks the country faced had increased following the EU referendum result. The UK was placed on negative watch, which puts the government on notice of possible further downgrades, after S&P described the result of the vote as “a seminal event” that would “lead to a less predictable, stable and effective policy framework in the UK”. The agency added that the vote to remain in Scotland and Northern Ireland “creates wider constitutional issues for the country as a whole”.

“..the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction.”

• Price Discovery, RIP (David Stockman)

That was quick. With nearly 85% of the Brexit loss recovered in three days and the market now up for the quarter and the year, what’s not to like? After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted,

Markets were boosted by reports indicating the ECB is weighing changes to its bond-buying program, while “the Bank of England also said they are all in,” said Joe Saluzzi at Themis Trading. The ECB is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from BOE Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat.

Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will “run out of securities to buy”. Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s “buy” button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be enough to go around. It turns out, however, that the operative phrase is “under current stipulations”. In a fit of apparent prudence, the ECB determined that in buying $90 billion of government bonds and other securities per month, it would only purchase securities with a yield higher than its negative 0.4% deposit rate.

That’s right. Stumbling around in their monetary puzzle palace, the geniuses at the ECB determined that subzero rates are just fine with one condition. Namely, so long as they don’t have to pay more to own German bonds, for example, than German banks are paying to deposit excess funds at the ECB. Stated differently, the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction. But then comes the catch-22. The more bonds Draghi promises to buy, the more the casino front-runners scarf-up those same bonds on 95% repo leverage – knowing that Mario will gift them with a big fat gain on their tiny sliver of capital at risk.

“The behaviour of the jet stream suggests massive hits to the [global] food supply and the potential for massive geopolitical unrest. There’s very strange things going on on planet Earth right now.”

• Scientists Warn Of ‘Global Climate Emergency’ Over Jet Stream Shift (Ind.)

Environmental scientists have declared a “global climate emergency” after the Northern hemisphere jet stream was found to have crossed the equator, bringing “unprecedented” changes to the world’s weather patterns. Robert Scribbler and University of Ottawa researcher Paul Beckwith warned of the “weather-destabilising and extreme weather-generating” consequences of the jet stream shift. The scientists said the anomalies were most likely precipitated by man-made climate change, which caused the jet stream to slow down and create larger waves. Scribbler wrote in a post on his environmental blog on Tuesday: “It’s the very picture of weather-weirding due to climate change. Something that would absolutely not happen in a normal world.

Something, that if it continues, basically threatens seasonal integrity. The blogger explained the barrier between the two jet streams generates the strong divide between summer and winter, and the “death of winter” could commence if it is eroded as warm weather leaks into the “winter zone” of the year. He continued: “As the poles have warmed due to human-forced climate change, the Hemispherical Jet Streams have moved out of the Middle Latitudes more and more. You get this weather-destabilising and extreme weather generating mixing of seasons.” Meanwhile, Mr Beckwith confirmed the changes would usher in a sustained period of “climate system mayhem” which could prove difficult to resolve.

He said: “Our climate system behaviour continues to behave in new and scary ways that we have never anticipated, or seen before. “Welcome to climate chaos. We must declare a global climate emergency. “The behaviour of the jet stream suggests massive hits to the [global] food supply and the potential for massive geopolitical unrest. There’s very strange things going on on planet Earth right now.”

Absolute must read. How is it possible that my adopted home away from home gets it so right, yet no-one else tries to learn from it?

• Refugees Encounter a Foreign Word: Welcome (NY Times)

Much of the world is reacting to the refugee crisis – 21 million displaced from their countries, nearly five million of them Syrian — with hesitation or hostility. Greece shipped desperate migrants back to Turkey; Denmark confiscated their valuables; and even Germany, which has accepted more than half a million refugees, is struggling with growing resistance to them. Broader anxiety about immigration and borders helped motivate Britons to take the extraordinary step last week of voting to leave the EU. In the United States, even before the Orlando massacre spawned new dread about “lone wolf” terrorism, a majority of American governors said they wanted to block Syrian refugees because some could be dangerous.

Donald J. Trump, the presumptive Republican presidential nominee, has called for temporary bans on all Muslims from entering the country and recently warned that Syrian refugees would cause “big problems in the future.” The Obama administration promised to take in 10,000 Syrians by Sept. 30 but has so far admitted about half that many. Just across the border, however, the Canadian government can barely keep up with the demand to welcome them. Many volunteers felt called to action by the photograph of Alan Kurdi, the Syrian toddler whose body washed up last fall on a Turkish beach. He had only a slight connection to Canada – his aunt lived near Vancouver – but his death caused recrimination so strong it helped elect an idealistic, refugee-friendly prime minister, Justin Trudeau.

The Toronto Star greeted the first planeload by splashing “Welcome to Canada” in English and Arabic across its front page. Eager sponsors toured local Middle Eastern supermarkets to learn what to buy and cook and used a toll-free hotline for instant Arabic translation. Impatient would-be sponsors — “an angry mob of do-gooders,” The Star called them — have been seeking more families. The new government committed to taking in 25,000 Syrian refugees and then raised the total by tens of thousands. In the ideal version of private sponsorship, the groups become concierges and surrogate family members who help integrate the outsiders, called “New Canadians.” The hope is that the Syrians will form bonds with those unlike them, from openly gay sponsors to business owners who will help them find jobs to lifelong residents who will take them skating and canoeing.

Ms. McLorg’s group of neighbors and friends includes doctors, economists, a lawyer, an artist, teachers and a bookkeeper. Advocates for sponsorship believe that private citizens can achieve more than the government alone, raising the number of refugees admitted, guiding newcomers more effectively and potentially helping solve the puzzle of how best to resettle Muslims in Western countries. Some advocates even talk about extending the Canadian system across the globe. (Slightly fewer than half of the Syrian refugees who recently arrived in Canada have private sponsors, including some deemed particularly vulnerable who get additional public funds. The rest are resettled by the government.)

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