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Debt Rattle December 9 2019

Dec 092019

December 9, 2019 Posted by Raúl Ilargi Meijer at 10:14 am Finance Tagged with: BIS, Brexit, cash, drone, hedge funds, Huawei, JPMorgan, Lavrov, market makers, NATO, repocalypse, Treasuries 6 Responses »

Lewis Wickes Hine News of the Titanic and possible survivors 1912

• US Banks’ Reluctance To Lend Cash May Have Caused Repo Shock: BIS (R.)

• BIS Offers Stunning Explanation Of What Happened On Repocalypse Day (ZH)

• The Incredible Shrinking Private Sector (G.)

• Northern Ireland Customs Protocol Could Thwart Brexit Plans (G.)

• Boris Johnson’s Promise Of Brexit By End Of 2020 Torpedoed By EU Chief (Mi.)

• The Invisible Tories (Craig Murray)

• China Tells Government Offices To Remove All Foreign Computer Equipment (G.)

• NATO Seeks To “Dominate The World”, Eliminate Competitors: Lavrov (ZH)

• Russian Air Defense System Shot Down US Drone Over Libyan Capital (R.)

From what I understand, big banks moved from cash to Treasuries, which decreased the amount of cash available for lending. Hedge funds also play a role. Have they become market makers?

• US Banks’ Reluctance To Lend Cash May Have Caused Repo Shock: BIS (R.)

The unwillingness of the top four U.S. banks to lend cash combined with a burst of demand from hedge funds for secured funding could explain a recent spike in U.S. money market rates, the Bank for International Settlements said. Cash available to banks for short-term funding all but dried up in late September, and interest rates deep in the plumbing of U.S. financial markets climbed into double digits. That forced the Fed to make an emergency injection of billions of dollars for the first time since the global financial crisis more than a decade ago.

While the exact cause of the squeeze is unclear – with explanations ranging from large withdrawals for quarterly tax payments to a big settlement of a trade in U.S. Treasuries – BIS analysts said the growing reliance on the biggest U.S. banks to keep the repo market functioning may have been a big factor. The big four banks, which BIS did not name in its report, have become net providers of funds to repo markets as they account for more than half of all Treasuries held by banks in the United States at the Federal Reserve.

The repo market underpins much of the U.S. financial system, helping ensure banks have liquidity to meet their daily operational needs. In a repo trade, Wall Street firms and banks offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often just overnight, to finance their trading and lending. The next day, borrowers repay the loans plus what is typically a nominal rate of interest and get their bonds back. In other words they repurchase, or repo, the bonds.

Did the big banks know the Fed would move in? Were there conversations between JPM and the Fed prior to the move into Treasuries??

• BIS Offers Stunning Explanation Of What Happened On Repocalypse Day (ZH)

About a month ago, we first laid out how the sequence of liquidity-shrinking events that started about a year ago, and which starred the largest US commercial bank, JPMorgan, ultimately culminated with the mid-September repo explosion. Specifically we showed how JPM’s drain of liquidity via Money Markets and reserves parked at the Fed may have prompted the September repo crisis and subsequent launch of “Not QE” by the Fed in order to reduce its at risk capital and potentially lower its G-SIB charge – currently the highest of all major US banks.

Shortly thereafter, the FT was kind enough to provide confirmation that the biggest US bank had been quietly rotating out of cash, while repositioning its balance sheet in a major way, pushing more than $130bn of excess cash away from reserves in the process significantly tightening overall liquidity in the interbank market. We learned that the bulk of this money was allocated to long-dated bonds while cutting the amount of loans it holds, in what the FT dubbed was a “major shift in how the largest US bank by assets manages its enormous balance sheet.”

The moves saw the bank’s bond portfolio soar by 50%, and were prompted by capital rules that treated loans as riskier than bonds. And since JPM has been aggressively returning billions of dollars to shareholders in dividends and share buybacks each year, JPMorgan had far less room than most rivals to hold riskier assets, explaining its substantially higher G-SIB surcharge, which indicated that the Fed currently perceives JPM as the riskiest US bank for a variety of reasons. An executive at a large institutional investor told the FT that what JPM did “is incredible”, adding that “the scale of what JPMorgan is doing is mind-boggling . . . migrating out of cash into securities while loans are flat.”

The dramatic change, which occurred gradually over the year, and which may have catalyzed the spike in repo rates in September, was first flagged by JPMorgan at an investor event back in February. Then CFO Marianne Lake said that, after years of industry-leading loan growth, “we have to recognize the reality of the capital regime that we live in”. About half a year later, the rest of the world did too when the overnight general collateral rate briefly did something nobody had ever expected it to do, when it exploded from 2% to about 10% in minutes, an absolutely unprecedented move, and certainly one that was seen as impossible in a world with an ocean of roughly $1.3 trillion in reserves floating around.

[..] in a novel twist, the BIS also found that hedge funds exacerbated the turmoil in the repo market with their thirst for borrowing cash to juice up returns on their trades. Here is what the BIS said: “US repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors.”

Britain.

• The Incredible Shrinking Private Sector (G.)

The latest GDP figures released on Wednesday suggest on the surface the overall economy is doing better, but further inspection highlights the underlying weakness. The domestic private sector is in a dire state, having now shrunk for four consecutive quarters – the worst result since the 1990s recession – and the economy is now more dependent on government spending to keep it afloat than at any time since the GFC . First the good news – things are better than we previously thought. The GDP figures contained some fairly significant revisions of past data, based on more accurate underlying data. Whereas in June it appeared the economy grew by just 1.5% – the worst since 2001 – now the ABS estimates in June the economy was growing at an annual rate of 1.7% and is now growing at 1.8% in trend terms:

This is good, and yet it is pretty sad really how low the bar has become to think economic growth can be called “good”. The current growth rate of 1.8% is around 1% point below the long-term trend and well below the old marker of 3% growth that used to be considered average. In the September quarter the economy grew by 0.4% (seasonally adjusted), or 0.5% (trend), still below average, but what is important is where this growth is being generated. The biggest driver was net exports – contributing 0.35% pts of that growth.

They don’t appear to have all the details figured out.

• Northern Ireland Customs Protocol Could Thwart Brexit Plans (G.)

Northern Ireland customs arrangements may thwart Boris Johnson’s plan to leave the EU by December 2020, according to a document said to be leaked from civil servants in the Department for Exiting the EU. In the document, seen by the Financial Times, staff raised concerns about the readiness of the new customs arrangement, calling the protocol to keep part of the EU customs code in Northern Ireland, a “major” obstacle to Brexit delivery. The FT reported that the document was sent to senior Whitehall officials last week and said that implementing the Northern Ireland protocol before next December was a “strategic, political and operational challenge”.

The protocol would implement a form of customs border between Northern Ireland and the rest of the UK – an alternative arrangement to the Northern Irish “backstop” in the withdrawal agreement. Civil servants reportedly highlighted the “legal and political” repercussions both within the UK and Europe of failing to deliver Brexit on time, which Boris Johnson has made it the focal issue of his election campaign. Doubt was also cast on the free-trade agreement that Johnson has pledged to establish with the EU next year, with the document, marked “official sensitive”, reportedly stating that “delivery on the ground would need to commence before we know the outcome of negotiations”.

The government said it did not comment on leaks, but insisted that its deal with the EU would comprehensively withdraw the whole of the UK – including Northern Ireland. It reiterated its commitment to complete the process before December 2020.

“The EU/UK future relationship cannot be settled in 11 months.”

• Boris Johnson’s Promise Of Brexit By End Of 2020 Torpedoed By EU Chief (Mi.)

Michel Barnier has torpedoed Boris Johnson’s promise that Brexit will be done and dusted by the end of next year. The Sunday Mirror has seen minutes of a private meeting between the EU’s chief Brexit negotiator and MEPs which rubbish the PM’s pledge. Mr Johnson has said he will not extend the transition period beyond 2020 – which raises the danger of the UK crashing out with no deal. Trade talks are planned after Britain formally leaves the EU on January 31. But Mr Barnier told EU Employment and Social Affairs Committee MEPs: “The EU/UK future relationship cannot be settled in 11 months.” He added that means prioritising some areas while more time will be needed for other issues such as transport.

Dominic Cummings focuses on social media, not canvassing.

• The Invisible Tories (Craig Murray)

I live in a marginal constituency, where the excellent Joanna Cherry of the SNP has a lead of just over 1,000 over the Tories. If the most recent opinion polls are correct, the parties’ standings at this moment are similar to the result last time, the momentum is with the Tories and this should be a key Tory target. Yet I have not received one single Tory leaflet (and I live on one of the main residential streets) nor have I seen one single Tory campaigner, including when I have been out delivering leaflets for Joanna Cherry myself. Nor have I seen one single Tory poster in a house.

It is not just on TV that the Tories have been skipping interviews and debates, they seem to have eschewed any semblance of a ground campaign too, in what presumably is a key target seat for them. Boris Johnson is not popular with any of the local residents I have spoken to, and there is no enthusiasm at all for Brexit in this part of Edinburgh. In short, I am absolutely unable to square the opinion polls with the evidence of my own eyes and ears.

What is your experience?

Sounds like quite the undertaking.

• China Tells Government Offices To Remove All Foreign Computer Equipment (G.)

China has ordered that all foreign computer equipment and software be removed from government offices and public institutions within three years, the Financial Times reports. The government directive is likely to be a blow to US multinational companies like HP, Dell and Microsoft and mirrors attempts by Washington to limit the use of Chinese technology, as the trade war between the countries turns into a tech cold war. The Trump administration banned US companies from doing business with Chinese Chinese telecommunications company Huawei earlier this year and in May, Google, Intel and Qualcomm announced they would freeze cooperation with Huawei.

By excluding China from western know-how, the Trump administration has made it clear that the real battle is about which of the two economic superpowers has the technological edge for the next two decades. This is the first known public directive from Beijing setting specific targets limiting China’s use of foreign technology, though it is part a wider move within China to increase its reliance on domestic technology.

“We have an answer to all the threats that the Alliance is multiplying in this world.”

• NATO Seeks To “Dominate The World”, Eliminate Competitors: Lavrov (ZH)

Russian Foreign Minister Sergei Lavrov has charged NATO with wanting to “dominate the world” a day after 70th anniversary events of the alliance concluded in London. “We absolutely understand that NATO wants to dominate the world and wants to eliminate any competitors, including resorting to an information war, trying to unbalance us and China,” Lavrov said from Bratislava, the capital of Slovakia, while attending the 26th Ministerial Council of the Organization for Security and Cooperation in Europe (OSCE). He seized upon NATO leaders’ comments this week, specifically Secretary General Jens Stoltenberg, naming China as a new enemy alongside Russia. Stoltenberg declared at the summit that NATO has to “tackle the issue” of China’s growing capabilities.

Lavrov told reporters Thursday: “I think that it is difficult to unbalance us and China. We are well aware of what is happening. We have an answer to all the threats that the Alliance is multiplying in this world.” He also said the West is seeking to dominate the Middle East under the guise of NATO as well. The new accusation of ‘world domination’ comes at a crisis moment of growing and deep divisions over the future of the Cold War era military alliance, including back-and-forth comments on Macron’s “brain death” remarks, and looming questions over Turkey’s fitness to remain in NATO, and the ongoing debate over cost sharing burdens and the scope of the mission.

“Naturally, we cannot but feel worried over what has been happening within NATO,” Lavrov stated. “The problem is NATO positions itself as a source of legitimacy and is adamant to persuade one and all it has no alternatives in this capacity, that only NATO is in the position to assign blame for everything that may be happening around us and what the West dislikes for some reason.”

Who operated each contraption?

• Russian Air Defense System Shot Down US Drone Over Libyan Capital (R.)

The U.S. military believes that an unarmed American drone reported lost near Libya’s capital last month was in fact shot down by Russian air defenses and it is demanding the return of the aircraft’s wreckage, U.S. Africa Command says. Such a shootdown would underscore Moscow’s increasingly muscular role in the energy-rich nation, where Russian mercenaries are reportedly intervening on behalf of east Libya-based commander Khalifa Haftar in Libya’s civil war. Haftar has sought to take the capital Tripoli, now held by Libya’s internationally recognized Government of National Accord (GNA). U.S. Army General Stephen Townsend, who leads Africa command, said he believed the operators of the air defenses at the time “didn’t know it was a U.S. remotely piloted aircraft when they fired on it.”

“But they certainly know who it belongs to now and they are refusing to return it. They say they don’t know where it is but I am not buying it,” Townsend told Reuters in a statement, without elaborating The U.S. assessment, which has not been previously disclosed, concludes that either Russian private military contractors or Haftar’s so-called Libyan National Army were operating the air defenses at the time the drone was reported lost on Nov. 21, said Africa Command spokesman Air Force Colonel Christopher Karns. Karns said the United States believed the air defense operators fired on the U.S. aircraft after “mistaking it for an opposition” drone. An official in Libya’s internationally recognized Government of National Accord (GNA) told Reuters that Russian mercenaries appeared to be responsible.

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Debt Rattle November 7 2018

Nov 072018

November 7, 2018 Posted by Raúl Ilargi Meijer at 10:08 am Finance Tagged with: austerity, Big Tech, digital tax, facial recognition, investigations, Italy, JPMorgan, metals, midterms, myopia, right whale, Trump 9 Responses »

M. C. Escher Drawing hands1948

• The Investigations Trump Will Face Now That Democrats Control the House (NY)

• Paul Ryan On Midterms: ‘Tonight History Has Repeated Itself’ (Hill)

• Ex-JP Morgan Trader Pleads Guilty To Manipulating US Metals Markets (CNBC)

• Italy’s Battle With Brussels Is About More Than Money (Molinari)

• EU Austerity Bias Is To Blame For Budget Standoff With Italy (Ind.)

• Wanted: Radical Economist To Boost UK Economy (G.)

• EU Stumbles In Plan To Levy 3% Digital Tax On Big Tech Firms (G.)

• France Demands New Digital Tax On Tech Giants Should Come This Year (CNBC)

• UK Accuses EU Of Brexit Bias As It Refuses To Endorse Aid Spending (G.)

• Facial Image Matching System Risks ‘Chilling Effect’ On Freedoms (G.)

• The West is Failing Julian Assange (Maurizi)

• Recovery Of Endangered Whales Hampered By Humans Long After Hunting (AFP)

• Children Urged To Play Outdoors To Cut Risk Of Shortsightedness (G.)

Yes, they dream of impeachment. Dozens of options. As per this New Yorker piece, even 2 years of Mueller isn’t enough, he must be replaced by a committee.

Likely to happen soon: Sessions, Mueller, maybe Rosenstein to be fired by Trump. And DNC/FBI operatives and activities investigated.

Be careful what you wish for.

• The Investigations Trump Will Face Now That Democrats Control the House (NY)

CNN projection at about 3 am EST

There are a half dozen House committees that have the power to investigate Trump—Intelligence, Oversight, Ways and Means, and Judiciary, among others. The chair of any committee—always a member of the majority party—has wide latitude to pursue investigations, issue subpoenas, and compel testimony. The news for the next year or longer seems likely to be dominated by a steady stream of coverage of the people closest to Trump as they testify before Congress under duress, or under a grant of immunity, or coverage of their refusal to speak at all for fear of incriminating themselves. At the same time, there could be regular reports about what the committee staff has found in subpoenaed records—perhaps Trump’s tax returns, his company’s internal financial documents, the records of his various oligarch partners in the former Soviet Union, and e-mails and other digital messages between Trump’s team and people in Russia.

For many Democrats—and quite a few independents and even a few Republicans—this is a gleeful prospect. After two years of feeling powerless, they will see, for the first time, a sustained, powerful check on Trump’s power and a public investigation with teeth and tools. It is hard to imagine that a serious investigation into Trump’s businesses, campaign, and Administration won’t uncover a lot of damaging information. There is, however, something of a split among Democratic Party operatives. I spoke with many of them—most wouldn’t speak on the record about an intraparty battle—and learned that there are two (or maybe three) distinct and contradictory views among influential Democrats.

Many are anxious to get going on these investigations as soon as possible. There is still a real possibility that the President colluded with the Russian government to sway an American election. Furthermore, there is growing evidence that his business and personal conduct has been so questionable that he could be compromised by multiple foreign governments. This is as serious a question as Congress could face, and needs to be investigated. Perhaps Robert Mueller will reveal all the information anyone could want, but maybe he won’t, and Congress cannot leave the investigation of the Administration to a special counsel who is, for all his hard-won independence, still a member of the administrative branch of government.

Same old same old. It’s about mitigating losses. Obama lost much more. Anywhere from 50-100 GOP Congressmen retired. That’s a huge loss. But they’re mostly moderates, and the new candidates are not.

• Paul Ryan On Midterms: ‘Tonight History Has Repeated Itself’ (Hill)

Paul Ryan (R-Wisc.) in his final statement as Speaker of the House said “history has repeated itself” this midterm election cycle, adding that “a party in power always faces tough odds in its first midterm election.” The Democrats took back the House on Tuesday night, flipping more than the 23 seats needed to take back control after eight years of a Republican majority. “It is always hard to see friends and good colleagues work so hard and fall short,” Ryan said in the statement. “Yet I’m proud of the campaign that our members and candidates ran in a challenging political environment.” Ryan’s statement noted that the president’s party since 1862 has lost an average of 32 House seats during the midterm elections.

The retiring Wisconsin Republican congratulated Democrats for winning the majority and the Senate Republicans for maintaining theirs. “We don’t need an election to know that we are a divided nation, and now we have a divided Washington,” Ryan added. “As a country and a government, we must find a way to come together to find common ground and build on the successes of this Congress.” Ryan announced earlier this year that he would be retiring in November. The GOP held Ryan’s vacated seat in Wisconsin on Tuesday night, as Republican Brian Steil won a closely watched-race against Democrat Randy Bryce.

“..he learned this practice from more senior traders and that his supervisors at the firm knew of his actions.”

• Ex-JP Morgan Trader Pleads Guilty To Manipulating US Metals Markets (CNBC)

An ex-J.P. Morgan Chase trader has admitted to manipulating the U.S. markets of an array of precious metals for about seven years — and he has implicated his supervisors at the bank. John Edmonds, 36, pleaded guilty to one count of commodities fraud and one count each of conspiracy to commit wire fraud, price manipulation and spoofing, according to a Tuesday release from the U.S. Department of Justice. Edmonds spent 13 years at New York-based J.P. Morgan until leaving last year, according to his LinkedIn account. As part of his plea, Edmonds said that from 2009 through 2015 he conspired with other J.P. Morgan traders to manipulate the prices of gold, silver, platinum and palladium futures contracts on exchanges run by the CME Group.

He and others routinely placed orders that were quickly cancelled before the trades were executed, a price-distorting practice known as spoofing. “For years, John Edmonds engaged in a sophisticated scheme to manipulate the market for precious metals futures contracts for his own gain by placing orders that were never intended to be executed,” Assistant Attorney General Brian Benczkowski said in the release. Of note for J.P. Morgan, the world’s biggest investment bank by revenue: Edmonds, a relatively junior employee with the title of vice president, said that he learned this practice from more senior traders and that his supervisors at the firm knew of his actions.

It’s about overeignty.

• Italy’s Battle With Brussels Is About More Than Money (Molinari)

The traditional parties – beginning with the biggest ones, the Democratic party and Forza Italia – failed to grasp the magnitude of the discontent, so the political prize went to those politicians who could. In the south it was Luigi Di Maio’s Five Star Movement that prevailed – thanks to its “citizenship income” proposal – a benefit of €780 (£680) a month for the unemployed. In the north it was Matteo Salvini’s League, which backed two horses at the same time: the so-called “flat tax” to help out businesses in difficulty; and a tough approach to migrants. Five Star and the League have clear dividing lines – their geographic base, their economic ideas and their social makeup. But they have one thing in common: hostility to the European Union.

Five Star accuses the EU of being the root cause of Italy’s economic woes, and the League blames it for having abandoned Italy to the migrant crisis. Which explains why, for Di Maio’s supporters as much as for Salvini’s, the current battle with the European commission over the government’s proposed budget, judged by Brussels to violate agreed eurozone spending restraint, is essentially about identity. The standoff is not just about the deficit, the outlook for growth, the failure to bring down Italy’s debt and the absence of reform: its root cause is the coalition’s belief that by revolutionising its relationship with the EU, Italy will be able to win back trust, optimism and a better future.

Hence the current short-circuit between Rome and Brussels. While the commission is trying to negotiate with Giovanni Tria, the minister for the economy, to modify the Italian budget, Salvini’s and Di Maio’s interests lie in a full-frontal confrontation with Europe.

But it’s still about money…

• EU Austerity Bias Is To Blame For Budget Standoff With Italy (Ind.)

[..] How is it that a far-right politician like Salvini, himself no enemy of big finance, can claim that he speaks for those opposing austerity, corporations and inequality? In short, because Europe’s traditional left has failed to do so. Salvini’s primary concern, of course, is not the majority of Italy’s poor. The claim that this is a budget to “abolish poverty” is pure hyperbole. In fact, the disputed budget is a mish-mash of policies aimed at pleasing both parts of the Italian coalition’s social base. For the League, this mean tax cuts on small businesses and the middle class and protection of better-off pensioners. Five Star meanwhile, the gradual introduction of universal basic income is an important, and progressive, element. There’s also some investment – though not enough.

Why does the EU care? The crux of the problem is that Italy wants to spend more than Eurozone rules allow. It’s planning to run a budget deficit equal to 2.4 per cent of GDP, too high, say EU rules, for a government with a debt as big as Italy’s (currently over 131 per cent of GDP). These are the rules of the Eurozone laid down in treaties (but always open to interpretation when it’s convenient). Any monetary union requires rules. On entering such a union, governments accept that they are giving something up – monetary policy – but gaining something else – in this case monetary stability, low interest rates, less exposure to the law of the markets. The problem in the EU is that the rules don’t work for the majority of European citizens, and they are particularly punishing to weaker economies.

After five years of 10 per cent unemployment and low or negative growth, Italy’s government says you have to spend and invest to repair a damaged economy. They compare their programme to that of the New Deal measures of President Roosevelt. This shouldn’t be controversial. But the Eurozone’s rules go in precisely the opposite direction – forcing austerity on stagnant and depressed countries in exactly the way the International Monetary Fund pushed austerity of dozens of developing countries in the 1980s and 90s. This result has been catastrophic in terms of human welfare.

Greece experienced the worst effects. It has experienced an economic collapse longer-lasting than the US’s Great Depression in the 1930s. GDP is still lower than it was in 2007. While unemployment has fallen from 30 per cent, it’s still at nearly 20 per cent, far higher in terms of young people. Wages and pensions have been slashed. Vast swathes of the economy have been sold (to the very financial sector which created the global financial crash), and debt is higher than ever, at 180 per cent of GDP, with payments due for decades into the future.

A radical who fits the existing mold. Oxymoronic.

• Wanted: Radical Economist To Boost UK Economy (G.)

One of the biggest cash prizes in world economics has been launched to find “radical ideas” to reinvigorate the British economy. Launched against a backdrop of deep public distrust in politicians to revitalise the UK economy, the Institute for Public Policy Research (IPPR) thinktank has lined up an £150,000 prize fund to uncover fresh ideas. It comes after growth figures revealed at the budget show economic growth in Britain has dropped to among the lowest levels in the G7, while inequality has risen and there are growing pressures on the environment. Believed to be the third-biggest prize in international economics, the new IPPR prize will reward policy solutions to tackle these problems, while forcing a “step change in the quality and quantity of the UK’s economic growth.”

It will include a single main prize of £100,000, placing it among the most lucrative prizes in the economics profession after the 9m Swedish krona (£760,455) Nobel award from the Swedish central bank and the £250,000 Wolfson prize, which was launched in 2011 by the Tory peer and Next chief executive Simon Wolfson. The IPPR economics prize – supported by the prominent Labour donor and Brexit campaigner John Mills – will also have a dedicated under-25s prize worth £25,000, and a runners-up prize pot of £25,000. Mills, who is the founder of the JML electronics company, said that Britain faced a “toxic cocktail of issues that need fresh solutions,” adding that growth has recently been 60% lower than the G20 average. “We are falling further behind every year. Our productivity is poor, levels of investment are meagre, and we cannot pay our way in the world,” he added.

[..] With a deadline of 6 January 2019, entrants for the economics prize will be asked to answer the question: “What would be your radical plan to force a step change in the quality and quantity of the UK’s economic growth?”

Taxes should not be a priority. Legal issues should be. Monopolies.

• EU Stumbles In Plan To Levy 3% Digital Tax On Big Tech Firms (G.)

A European Union plan to tax Google, Facebook and other internet firms risks failure after a handful of member states announced their opposition. EU countries are studying proposals to levy a 3% tax on big internet companies that make money from user data or digital advertising, in a bid to level the playing field with bricks-and-mortar companies that pay more tax. But the idea, which must be agreed unanimously by all 28 member states, is running into serious opposition, as Ireland, Sweden and Denmark made their criticism public on Tuesday.

Germany had initially supported the idea in a joint agreement with France, but is now seeking to water down and delay the proposals, moves that are causing deep frustration in Paris. A dozen countries are moving ahead with their own national digital taxes, with Spain and the UK among the recent converts. The chancellor, Philip Hammond, announced last week that the UK was prepared to go it alone, with a “narrowly-targeted” digital services tax that is expected to come into force in April 2020 and raise £400m for the exchequer. Opponents to the digital tax fear the wrath of Donald Trump’s White House, which regards the EU’s efforts to ensure “fair taxation” of internet giants as an attack on American companies, a charge the EU rejects.

This year has less than two months left.

• France Demands New Digital Tax On Tech Giants Should Come This Year (CNBC)

The French government has pushed for a new levy on internet giants, such as Google, Apple, Facebook and Amazon, in order to make these firms pay what they see as a fairer tax rate in the region. This measure is likely to get some sympathy among voters ahead of next spring’s European elections. However, some technical differences among European countries have not allowed substantial progress on this front. Critics of the new tax also say that it could stifle innovation. “We want the adoption of the directive on digital taxation by the end of this year. This is a clear red line for the French government,” Bruno Le Maire, France’s finance minister told reporters in Brussels as he prepared to discuss the issue with his European counterparts.

“We are aware there are some technical issues and technical concerns, but these are technical concerns not political problems, so we still have three or four weeks before the next Ecofin (a regular meeting between EU finance ministers) to fix those technical issues,” Le Maire said. “And I will spend day and night with my German friends to find a compromise and to find a solution on those technical issues. But nobody could take advantage of those technical difficulties to avoid its political responsibility,” the French lawmaker added. There are different concerns across Europe regarding a new tax on the digital giants. Some member states believe that such a tax would be harmful for smaller countries, or potentially hurt some traditional industries. Both Ireland and the Netherlands believe the EU should wait for an international approach to avoid looking “anti-business.”

According to data from the European Commission, digital companies pay on average an effective tax rate of 9.5 percent — compared to 23.2 percent for traditional businesses. The EU proposals include a “common EU solution” which would allow member states to tax profits that are generated in their territory, even if these companies do not have a physical presence there.

Yeah, NGOs are a big priority for May.

• UK Accuses EU Of Brexit Bias As It Refuses To Endorse Aid Spending (G.)

The British government has taken the unprecedented step of refusing to endorse billions of pounds of EU spending on aid projects, as it accused the European commission of discriminating against UK-based organisations over Brexit. In a vote among the 28 member states on the latest allocation of the bloc’s £26.5bn development budget, the UK government declined to give its support for aid spending for the first time. It instead issued a statement accusing the commission of failing to offer the best value for money for European taxpayers by discriminating against British-based organisations that were seeking funding. The criticism was made in response to a commission decision to include clauses in its contracts with aid providers stating all funding will be terminated should there be a no-deal Brexit.

British NGOs have been further warned that unless they can commit to making good the loss of funding should the UK crash out of the EU, they should not compete for funds. A UK government statement explaining its abstention on plans for the European development fund (EDF) expressed particular frustration over the failure of the commission to respond to a letter of complaint from the international development secretary, Penny Mordaunt. The statement, obtained by the Guardian, said the UK was “still waiting for a response to the concerns raised at a political level in August, including via secretary of state for international development’s letter to the commission of 23 August 2018, on the treatment of UK entities in the tendering process of EU programmes”.

From Australia. These things can no longer be stopped. But yes, privacy is gone.

• Facial Image Matching System Risks ‘Chilling Effect’ On Freedoms (G.)

Civil rights groups have warned a vast, powerful system allowing the near real-time matching of citizens’ facial images risks a “profound chilling effect” on protest and dissent. The technology – known in shorthand as “the capability” – collects and pools facial imagery from various state and federal government sources, including driver’s licences, passports and visas. The biometric information can then rapidly – almost in real time – be compared with other sources, such as CCTV footage, to match identities. The system, chiefly controlled by the federal Department of Home Affairs, is designed to give intelligence and security agencies a powerful tool to deter identity crime, and quickly identify terror and crime suspects.

But it has prompted serious concern among academics, human rights groups and privacy experts. The system sweeps up and processes citizens’ sensitive biometric information regardless of whether they have committed or are suspected of an offence. Critics have warned of a “very substantial erosion of privacy”, function creep and the system’s potential use for mass general surveillance. There are also fears about the level of access given to private corporations and the legislation’s loose wording, which could allow it to be used for purposes other than related to terrorism or serious crime. States agreed to the concept at a Council of Australian Governments meeting last year, though it is yet to be legislated by federal parliament.

Stefania Maurizi is an Italian journalist. She has worked on all WikiLeaks releases of secret documents, and partnered with Glenn Greenwald to reveal the Snowden files about Italy.

• The West is Failing Julian Assange (Maurizi)

Documents reveal that the UK authorities referred to the Assange case as not an ordinary one from the very beginning. “Please do not think that the case is being dealt with as just another extradition request,” they wrote on January 13, 2011 to the Swedish prosecutors. A few months later, a UK official added: “I do not believe anything like this has ever happened, either in terms of speed or in the informal nature of the procedures. I suppose this case never ceases to amaze.” What is special about this case? And why did the UK authorities keep insisting on extradition at all costs?

At some point even the Swedish prosecutors seemed to express doubts about the legal strategy advocated by their UK counterpart. Emails between UK and Swedish authorities I have obtained under FOIA show that in 2013 Sweden was ready to withdraw the European Arrest Warrant in light of the judicial and diplomatic paralysis the request for extradition had created. But the UK did not agree with lifting the arrest warrant: the legal case dragged on for another four years, when finally on the May 19, 2017, Sweden dropped its investigation after Swedish prosecutors had questioned Assange in London, as he had always asked.

Although the Swedish probe was ultimately terminated, Assange remains confined. No matter that the UN Working Group on Arbitrary Detention established that the WikiLeaks founder has been arbitrarily detained since 2010, and that he should be freed and compensated. The UK, which encourages other states to respect international law, doesn’t care about the decision by this UN body whose opinions are respected by the European Court of Human Rights. After trying to appeal the UN decision and losing the appeal, Britain is simply ignoring it. There is no end in sight to Assange’s arbitrary detention.

We’ll kill ’em off yet.

• Recovery Of Endangered Whales Hampered By Humans Long After Hunting (AFP)

When an endangered female North Atlantic right whale spends months, even years, disentangling itself from cast-off fishing nets, there’s not much energy left over for mating and nursing calves. Coping with such debris, along with ship collisions and other forms of human encroachment, have severely stymied recovery of the majestic sea mammals long after explosive harpoons and factory ships nearly wiped them out, according to a study published Wednesday. Once numbering in the tens of thousands, the northern whale’s population — hovering around 450 today — climbed slowly from 1990, but began to drop again around 2010.

Had the Canadian and US waters they plied during that quarter of a century been pristine and uncluttered by human traffic, “the species’ numbers would be almost double what they are now, and their current emergency wouldn’t be so dire,” scientists led by Peter Corkeron of the NOAA Northeastern Fisheries Science Center in Massachusetts reported. More to the point, there would be twice as many female whales: “The general slope of the recovery trajectory is driven by female mortality,” they added. From 1970 to 2009, 80 percent of 122 known North Atlantic right whale deaths were caused by human objects or activity. The species has not been hunted for more than half a century.

Modern man is fat, depressed and blind.

• Children Urged To Play Outdoors To Cut Risk Of Shortsightedness (G.)

Children should be encouraged to spend time outdoors to reduce their risk of becoming shortsighted, experts have said. Shortsightedness is rising around the world, with the condition said to have reached epidemic proportions in east Asia: estimates suggest about 90% of teenagers and young adults in China have the condition. While genetics are thought to play a large role in who ends up shortsighted – a condition that is down to having an overly long eyeball – research also suggests environmental factors are important. Several studies have found children who spend more time outdoors have a lower risk of myopia.

While some report that looking into the distance could be important, others say exposure to outdoor light is key. Experts say they have found new factors, and confirmed others, which could affect a child’s risk of becoming shortsighted. These include playing computer games, being born in the summer and having a more highly educated mother. “There is not much you can do about when your child is born … but periods indoors doing indoor activities does increase your risk of myopia,” said Katie Williams, an author of the study by King’s College London. “A healthy balance of time outdoors and a balance during early education is important.”

Debt Rattle October 7 2017

Oct 072017

October 7, 2017 Posted by Raúl Ilargi Meijer at 8:39 am Finance Tagged with: blockchain, BLS, Canada, Catalonia, Greece, JPMorgan, Nate, OECD, Russiagate 4 Responses »

Vincent van Gogh Landscape at twilight 1890

• BLS Caught Fabricating Wage Data (ZH)

• Tropical Storm Nate Heads Into The Heart Of US Offshore Oil Industry (CNBC)

• It’s ‘Crunch Time’ For Australian Households (BI)

• JPMorgan Paid Fine for 2008 Mortgage Crisis With .. Phony Mortgages (N.)

• EU Official Warns War a Possibility in Catalonia (VoA)

• Spain Apologizes, Tone Softens In Catalonia Independence Crisis (R.)

• OECD New Approaches to Economic Challenges (Steve Keen)

• Mainstream Economists Live In A Parallel Universe (Ren.)

• Light It Up (Jim Kunstler)

• Russiagate Is More Fiction Than Fact (Nation)

• Your Local Bank Could Be the Central Bank (BBG)

• US Escalates Trade Dispute With UK And Canada Over Bombardier (G.)

• Canada Will Pay Compensation To Thousands Of Indigenous ‘Stolen Children’ (R.)

• FDP Chief Says Schaeuble ‘Not Tough Enough’ On Greece (K.)

• Greece’s Ruling Syriza Party Falls Apart (K.)

• Overcrowded Greek Refugee Camps Ill-Prepared For Winter: UNHCR (R.)

And loses 33,000 jobs while unemployment falls?! And 935,000 full time jobs are added. Time to stop paying any attention to the B(L)S. You can’t trust it.

• BLS Caught Fabricating Wage Data (ZH)

[..] the BLS reported that the annual increase in Average Weekly Earnings was a whopping 2.9%, above the 2.5% expected, and above the 2.5% reported last month. On the surface this was a great number, as the 2.9% annual increase – whether distorted by hurricanes or not – was the highest since the financial crisis. However, a problem emerges when one looks just one month prior, at the revised August data. What one sees here, as Andrew Zatlin of South Bay Research first noted, is that while the Total Private Average Weekly Earnings line posted another solid increase of 0.2% month over month, an upward revision from the previous month’s 0.1%, when one looks at the components, it become clear that the BLS fabricated the numbers, and may simply hard-coded its spreadsheet with the intention of goalseeking a specific number.

Presenting Exhibit 1: Table B-3 in today’s jobs report. What it shows is that whereas there was a sequential decline in the Average Weekly Earnings for Goods Producing and Private Service-producing industries which are the only two sub-components of the Total Private Line (and are circled in red on the table below) of -0.8% and -0.1% respectively, the BLS also reported that somehow, the total of these two declines was a 0.2% increase! Another way of showing the July to August data: • Goods-Producing Weekly Earnings declined -0.8% from $1,118.68 to $1,109.92 • Private Service-Providing Weekly Earnings declined -0.1% from $868.80 to $868.18 • And yet, Total Private Hourly Earnings rose 0.2% from $907.82 to $909.19. What the above shows is, in a word, impossible: one can not have the two subcomponents of a sum-total decline, while the total increases. The math does not work.

This, as Zatlin notes, undermines not only the labor inflation narrative, but it puts into question the rest of the overall labor data, and whether there are other politically-motivated, goalseeked “spreadsheet” errors. We have sent an email to the BLS seeking an explanation for the above data fabrication, meanwhile here is what likely happened: a big, juicy fat-finger error, whether on purpose or otherwise because if one looks at the finalized July weekly earnings of $907.82, it’s precisely the same as what the August preliminary wage number was as released last month, also $907.82. For the excel fans out there, it means that the August totals were simply hard coded when the BLS shifted cells in the spreadsheet, becoming July.

Will probably be a Cat 2-3 hurricane by then.

• Tropical Storm Nate Heads Into The Heart Of US Offshore Oil Industry (CNBC)

As Tropical Storm Nate continued on its course toward the Gulf of Mexico on Friday, energy companies shut down offshore oil and gas platforms, while Louisiana braced for a potential hurricane. Nate is forecast to strengthen as it enters the Gulf and develop into a hurricane by the time it reaches the northern Gulf Coast on Saturday evening, the National Hurricane Center said Friday. Hurricane and storm surge watches are in effect for southeastern Louisiana, including New Orleans, through the Mississippi-Alabama border. The Gulf is home to nearly one-fifth of all U.S. oil output. Drillers who pump crude from offshore platforms have lately produced at record levels above 1.7 million barrels a day. The region already had to contend with Hurricane Harvey in August.

“The major difference between Harvey and Nate is that the trajectory of Nate brings it right through the heart of the U.S. Gulf of Mexico oil and gas producing region,” said Andy Lipow, president of Lipow Oil Associates. BP and Chevron are ceasing production on all platforms in the Gulf of Mexico, Reuters reported. Royal Dutch Shell and Anadarko Petroleum dialed back activity, while Exxon Mobil, Statoil and others are withdrawing workers. If Nate develops into a Category 2 or 3 hurricane, it could impact up to 80% of the Gulf’s output, Lipow forecast. The storm also has the potential to affect about 15% of U.S. refining capacity in the New Orleans area, Mississippi and Alabama. The region’s biggest refineries include Exxon Mobil’s Baton Rouge facility and Marathon Petroleum’s Garyville, Louisiana, plant, both capable of turning out more than 500,000 barrels a day.

A whole nation full of debt slaves in denial. And not the only nation either.

• It’s ‘Crunch Time’ For Australian Households (BI)

Australian households are in a vulnerable financial position, especially those who have taken out a mortgage. And in an era of weak incomes growth, soaring energy prices and high levels of indebtedness, with the prospect of higher interest rates on the way, many intend to cut discretionary spending in anticipation of even tighter household budgets. That’s the finding of the latest AlphaWise survey conducted by Morgan Stanley, which paints an unsettling picture on the outlook for not only Australia’s retail sector, but also the broader economy. Yes, the weakness in retail sales over the past two months may soon become entrenched. The “crunch time” for Australian households, as Morgan Stanley puts it, has begun. “In early June, we expressed the view that the Australian consumer faces a domestic cash flow and credit crunch,” the bank wrote in a note released this week.

“Income growth has not recovered, ‘cost of living’ inflation is re-accelerating and ‘macro-prudential’-related tightening of credit conditions is extending from housing into consumer finance.” In order to test how households may respond to higher interest rates, whether as a result of macroprudential measures to slow investor and interest-only housing credit growth or official moves from the Reserve Bank of Australia (RBA), Morgan Stanley conducted a national survey of 1,836 mortgagors to identify household conditions during late July and early August. Australia’s 2016 census found that 34.5% of households were currently paying off a mortgage. Morgan Stanley says the survey was designed to provide insight into the health of the household balance sheet, including their spending intentions as a result of higher mortgage rates. The news was not good.

“Findings from the AlphaWise survey confirm the stresses in the consumer sector we have been highlighting for some time now,” it says. “Most households have minimal buffers against a shock to their income, and expect to respond to higher debt servicing costs by drawing down on savings and cutting back on expenditure. “Other sectors of the economy may be able to offset some of the headline weakness, but the concentrated exposure of the household sector and economy to an extended housing market is posing an increasingly important structural and cyclical risk to consumer spending.” Of those households surveyed, 54% said they intended to cut back on expenditure in response to higher interest rates, with a further 25% planning to draw down on their savings to cope with higher servicing costs, a pattern that has been seen in Australia’s savings ratio which fell to a post-GFC low in the June quarter.

Somewhat alarmingly, 40% of those surveyed indicated that they did not save at all over the past year, particularly among low-income households. [..] “Only around 13% of respondents expect to be able to save more in the next 12 months..”

Read the whole thing. It’s completely insane.

• JPMorgan Paid Fine for 2008 Mortgage Crisis With .. Phony Mortgages (N.)

You know the old joke: How do you make a killing on Wall Street and never risk a loss? Easy—use other people’s money. Jamie Dimon and his underlings at JPMorgan Chase have perfected this dark art at America’s largest bank, which boasts a balance sheet one-eighth the size of the entire US economy. After JPMorgan’s deceitful activities in the housing market helped trigger the 2008 financial crash that cost millions of Americans their jobs, homes, and life savings, punishment was in order. Among a vast array of misconduct, JPMorgan engaged in the routine use of “robo-signing,” which allowed bank employees to automatically sign hundreds, even thousands, of foreclosure documents per day without verifying their contents.

But in the United States, white-collar criminals rarely go to prison; instead, they negotiate settlements. Thus, on February 9, 2012, US Attorney General Eric Holder announced the National Mortgage Settlement, which fined JPMorgan Chase and four other mega-banks a total of $25 billion. JPMorgan’s share of the settlement was $5.3 billion, but only $1.1 billion had to be paid in cash; the other $4.2 billion was to come in the form of financial relief for homeowners in danger of losing their homes to foreclosure. The settlement called for JPMorgan to reduce the amounts owed, modify the loan terms, and take other steps to help distressed Americans keep their homes. A separate 2013 settlement against the bank for deceiving mortgage investors included another $4 billion in consumer relief.

A Nation investigation can now reveal how JPMorgan met part of its $8.2 billion settlement burden: by using other people’s money. Here’s how the alleged scam worked. JPMorgan moved to forgive the mortgages of tens of thousands of homeowners; the feds, in turn, credited these canceled loans against the penalties due under the 2012 and 2013 settlements. But here’s the rub: In many instances, JPMorgan was forgiving loans on properties it no longer owned. The alleged fraud is described in internal JPMorgan documents, public records, testimony from homeowners and investors burned in the scam, and other evidence presented in a blockbuster lawsuit against JPMorgan, now being heard in US District Court in New York City.

Big demos today against Catalans.

• EU Official Warns War a Possibility in Catalonia (VoA)

The team captain of Spain’s storied football club Barcelona, which has become a focal point of secessionist Catalan sentiment, is urging politicians in Madrid and the Catalan capital to start negotiating about the future of Spain’s restive northeast province. “Before we do ourselves more damage, those in charge must open dialogue with each other. Do it for all of us. We deserve to live in peace,” Andrés Iniesta wrote on his Facebook page, apologizing at the same time for weighing in on “situations that are complex.” His appeal came as a top EU official Thursday warned that the separatist dispute, exacerbated by Catalan secessionists holding an illegal independence referendum Sunday, risks escalating into armed conflict.

“The position is very, very alarming. Civil war is conceivable there, in the middle of Europe,” Gunther Oettinger, the Germany EU commissioner said at an event in Munich. Oettinger and the EU Commission, the European bloc’s governing body, which fears Catalan independence might stir up separatism elsewhere in Europe, have also urged the authorities in Madrid and Barcelona to start negotiations and to avoid further provocations. But there are little signs of that happening. Both sides appear to be standing firm in Spain’s worst constitutional crisis since an attempted coup in 1981. [..] Nationalist sentiment is deepening fast: in Madrid observers have noted more buildings are sporting the Spanish national flag. Spaniards have long harbored an historical fear of dismemberment – Catalan nationalist sentiment was a key factor behind the Spanish civil war of the 1930s.

Wonder how long that holds.

• Spain Apologizes, Tone Softens In Catalonia Independence Crisis (R.)

Spain apologized on Friday for a violent police crackdown on Catalonia’s independence referendum, in a conciliatory gesture as both sides looked for a way out of the nation’s worst political crisis since it became a democracy four decades ago. Spain’s representative in northeast Catalonia, which accounts for a fifth of the national economy, made the apology just as Catalonia’s secessionist leader appeared to inch away from a plan to declare independence as early as Monday. “When I see these images, and more so when I know people have been hit, pushed and even one person who was hospitalized, I can’t help but regret it and apologize on behalf of the officers that intervened,” Enric Millo said in a television interview.

[..] Moments earlier, a Catalan parliament spokeswoman said the regional government’s leader, Carles Puigdemont, had asked to address lawmakers on Tuesday, in timing that appeared at odds with earlier plans to move an independence motion on Monday. Puigdemont wanted to speak on the “political situation”. The softer tone contrasted with remarks earlier on Friday from Catalonia’s head of foreign affairs who told BBC radio it would go ahead with an independence debate in the regional parliament. Spanish Prime Minister Mariano Rajoy has offered all-party political talks to find a solution, opening the door to a deal giving Catalonia more autonomy. But he has ruled out independence and rejected a Catalan proposal for international mediation.

Steve in the lion’s den. “The OECD was one of the formal economic policy groups that wildly misinterpreted the economic data of 2007..”

• OECD New Approaches to Economic Challenges (Steve Keen)

This is one of the highlights so far of my life as a rebel economist: giving an invited talk at the OECD. The OECD was one of the formal economic policy groups that wildly misinterpreted the economic data of 2007, believing that it heralded “sustained growth in OECD economies … underpinned by strong job creation and falling unemployment.” Five years later, they established the New Approaches to Economic Challenges (NAEC) initiative, and they’re trying to expand the horizons of economics beyond the narrow and fallacious confines of Neoclassical economics. Being invited to speak there, and getting such a positive reception from OECD Ambassadors, confirmed my belief that if change is to come in economics, it will come from formal economic bodies (the OECD, IMF, Central Banks and Treasuries) rather than university departments.

Formal bodies have to wear the consequences of being wrong about the economy, whereas Neoclassical-dominated university departments can retreat into isolation when the real world fails to conform to their fantasies about it. Nothing is certain however. The desire to fall back into ideologically comfortable but practically false ways of thinking about the economic system is strong. Groups like NAEC within the OECD need support, and they themselves need to support the young students in Rethinking Economics, who are far more amenable to a new paradigm than their hidebound academic instructors in the major Universities.

“Neoclassical economists are not experts on money but experts in finding reasons to believe you can model capitalism as though money banks and debt don’t exist. “And then you give them the right to control the banking system.”

• Mainstream Economists Live In A Parallel Universe (Ren.)

Neoclassical economic theory claims that the human being is a rational self-serving profit maximising unit. It claims to prove the market can handle anything. Classical economists model the economy based on the concept of rational consumers maximising utility and firms maximising profits. Their vision of the world claims that equilibrium is reached and the world functions best if there is no government, no trade unions and no monopolies. Professor Keen says mainstream economist change reality to fit their model. University campuses used to be about education, challenging people exposing them to ideas they didn’t necessarily have in the first instance. But Professor Keen says economics actually leads away from this possibility. “Economics starts by inculcating a view of how you should think about the economy that rules out a whole range of alternatives,” he said.

“It rules out thinking about the sort of work that I do, working from the top down, looking at the overall economy and modelling that way. They say ‘no, you’ve got to start from the isolated individual and you have to talk about individuals for maximising utility’. We’re talking about them as consumers or firms who are maximising profits. “In their mind that is the definition of a perfectly functioning system, but it is not the definition of the world in which we live. “Once you’ve got the mathematical structure of trying to do that, you have a very hard time treating anything else as a sensible analysis of capitalism. They rule out a whole lot of other ways of thinking.”

[..] “Imagine capitalism with no banks, no debt, and no money,” says Professor Keen. “You’re getting pretty close to being a neoclassical economist.” “Neoclassical economists are not experts on money but experts in finding reasons to believe you can model capitalism as though money banks and debt don’t exist. “And then you give them the right to control the banking system.”

“..with half of the flyover population in an opiate daze, and chain-stores shuttering to the tune of 10,000 this year, and car leases expiring into a car market dependent on liar loans bundled into janky securities, and the debt problem festering away like a something dead under the floor boards.”

• Light It Up (Jim Kunstler)

Grinning like Wonderland’s Cheshire Cat, the Golden Golem of Greatness pronounced this interval of fine fall weather “the calm before the storm.” Hmmmm. Talk about cryptic. This was less than a week after he verbally smacked down Secretary of State Rex Tillerson for “wasting his time” trying to diplomatically reach “Little Rocket Man… “ whereby Rex riposted, calling the President a “moron.” Ordinarily — say, during the past 220-odd years of this nation’s existence — talk like that would prompt a resignation (though, there are no other instances of talk like that). illerson must think that for the good of the country he can’t resign, and God knows what kind of desperate notes are being swapped around between the State Department and the Pentagon.

[..] We are entering a slot of time where an awful lot of things might go wrong. What gets me is seeing the stock markets make new record highs every other day, whether Puerto Rico is destroyed overnight or hundreds of people are shot in a Las Vegas parking lot — and notwithstanding the overall phony-baloney condition of the American economy, with half of the flyover population in an opiate daze, and chain-stores shuttering to the tune of 10,000 this year, and car leases expiring into a car market dependent on liar loans bundled into janky securities, and the debt problem festering away like a something dead under the floor boards. Some kind of financial accident with a this-sucker-is-going-down flavor feels like it’s waiting to happen.

I don’t think Trump was referring to that either, but what if it came down around the same moment that we decided to light up North Korea? Or, alternately, if Rex Tillerson, Mike Pence, and a score of other senior politicos decide that its time for Trump to go? The president is looking mighty friendless these days, and more than a little reckless. I mean, for the good of the country, ladies and gentlemen, what are they waiting for? Will his generals defend him? Nah. Fuggedabowdit. I wonder what the code-name for their action will be. Operation Moron Overboard? The whole spectacle is starting to look like a Coen Brothers movie. When the time comes, I hope they will make the documentary about these strange days of October, 2017.

But it will just keep going.

• Russiagate Is More Fiction Than Fact (Nation)

In the electrified aftermath of the election, aides to Hillary Clinton and Obama pored over polling numbers and turnout data, looking for clues to explain what they saw as an unnatural turn of events. One of the theories to emerge from their post-mortem was that Russian operatives who were directed by the Kremlin to support Trump may have taken advantage of Facebook and other social media platforms to direct their messages to American voters in key demographic areas in order to increase enthusiasm for Trump and suppress support for Clinton. These former advisers didn’t have hard evidence that Russian trolls were using Facebook to micro-target voters in swing districts—at least not yet—but they shared their theories with the House and Senate intelligence committees, which launched parallel investigations into Russia’s role in the presidential campaign in January.

The theories paid off. A personal visit in May by Democratic Senator Mark Warner, vice-chair of the Senate Intelligence Committee, “spurred the company to make some changes in how it conducted its internal investigation.” Facebook’s announcement in August of finding 3,000 “likely” Russian ads is now an ongoing “scandal” that has dragged the company before Congressional committees. Other election threats loom. A recent front-page New York Times article linking Russian cyber operations to voting irregularities across the United States is headlined, “Russian Election Hacking Efforts, Wider Than Previously Known, Draw Little Scrutiny.” But read on and you’ll discover that there is no evidence of “Russian election hacking,” only evidence-free accusations of it.

Voting problems in Durham, North Carolina, “felt like tampering, or some kind of cyberattack,” election monitor Susan Greenhalgh says, and “months later…questions still linger about what happened that day in Durham as well as other counties in North Carolina, Virginia, Georgia and Arizona.” There is one caveat: “There are plenty of other reasons for such breakdowns—local officials blamed human error and software malfunctions—and no clear-cut evidence of digital sabotage has emerged, much less a Russian role in it.” The evidence-free concern over Russian hacking expanded in late September when the Department of Homeland Security informed 21 states that they had been targeted by Russian cyber-operations during the 2016 election. But three states have already dismissed the DHS claims, including California, which announced that after seeking “further information, it became clear that DHS’s conclusions were wrong.” Recent elections in France and Germany saw similar fears of Russian hacking and disinformation—and similar results.

In France, a hack targeting the campaign of election winner Emmanuel Macron ended up having “no trace,” of Russian involvement, and “was so generic and simple that it could have been practically anyone,” the head of French cyber-security quietly explained after the vote. Germany faced an even more puzzling outcome: Nothing happened. “The apparent absence of a robust Russian campaign to sabotage the German vote has become a mystery among officials and experts who had warned of a likely onslaught,” the Post reported in an article headlined “As Germans prepare to vote, a mystery grows: Where are the Russians?” The mystery was so profound that The New York Times also explored it days later: “German Election Mystery: Why No Russian Meddling?”

RIpping apart the blockchain.

• Your Local Bank Could Be the Central Bank (BBG)

In practice it is difficult to envisage a sustainable digital currency that would not be accessible to all; cryptocurrencies are increasingly attractive to the general public. As for privacy, a decentralized ledger, on top of the security advantage it brings, makes the anonymity attached to cash transactions technically possible, and is thus nothing new. The BIS acknowledges as much: While it may look odd for a central bank to issue a cryptocurrency that provides anonymity, this is precisely what it does with physical currency, i.e. cash. Perhaps a key difference is that, with a retail CBCC, the provision of anonymity becomes a conscious decision.

Some might argue that an anonymous payment network would run against the current trend in anti-money-laundering regulation, where the origin of invested cash is carefully vetted to avoid criminal or tax evasion activities. Technically, there is nothing to prevent central bank digital currencies from being fully traceable. Even a decentralized ledger (where transactions are recorded digitally across many computers) only provides the potential for anonymity but does not guarantee it. But if there is no desire for anonymity, then there would be no need for the ledger to be decentralized. The logical outcome would be for central banks themselves to offer retail services, taking deposits from the general public. The BIS considers this possibility:

“We argue that the main benefit that a consumer-facing retail CBCC would offer, over the provision of public access to (centralized) central bank accounts, is that the former would have the potential to provide the anonymity of cash. In particular, peer-to-peer transfers allow anonymity vis-à-vis any third party. If third-party anonymity is not of sufficient importance to the public, then many of the alleged benefits of retail CBCCs can be achieved by giving broad access to accounts at the central bank.” A central bank e-minting monopoly would fundamentally change the structure of the banking system, leading to an increased monetary basis and seigniorage. Any temptation to abuse the enhanced minting monopolies would be reduced not by new technology but by the competitive alternatives offered by other countries’ digital currencies, or even, if necessary, old-fashioned valuable commodities.

The introduction of CBBCs that are traceable would also bring about a revolutionary transformation of the financial system architecture. This is, quite obviously, the opposite of the libertarian ideology underpinning the original cryptocurrencies. It would also accelerate the dismantling of the banking system as we know it. With central banks offering retail services, commercial banks would lose deposits, and with it their ability to lend. It would curtail or end the role of the money multiplier – whereby banks lend more than they receive in deposits, thus increasing the overall money supply – in the economy, and so necessitate massive monetary creation to maintain levels of liquidity in the market. Lending would increasingly be made by regulated specialized funds.

Strange and ugly.

• US Escalates Trade Dispute With UK And Canada Over Bombardier (G.)

The US has escalated its trade dispute with Britain and Canada by announcing plans to slap a further 80% duty on the export of planes built by Bombardier. The move follows complaints by Boeing that Canadian-owned Bombardier, which employs more than 4,000 people in Belfast, had dumped its C Series jets at “absurdly low” prices. Bombardier is facing a planned 220% tariff as part of a separate investigation, the US Department of Commerce confirmed. A second levy of 80% is also being applied to Bombardier’s sales to the US after a preliminary finding that the jets were sold below cost price to Delta Air Lines in 2016. Boeing claimed that 75 aircraft were sold at nearly £10.6m below cost price. Bombardier dismissed the claim as “absurd”. The company is due to begin delivering a blockbuster order for up to 125 new jets to Atlanta-based Delta next year.

The US commerce secretary, Wilbur Ross, said: “The United States is committed to free, fair and reciprocal trade with Canada, but this is not our idea of a properly functioning trading relationship. We will continue to verify the accuracy of this decision, while doing everything in our power to stand up for American companies and their workers.” [..] The proposed duties would not take effect unless affirmed by the US International Trade Commission (ITC) early next year. To win its case before the ITC, Boeing must prove it was harmed by Bombardier’s sales, despite not using one of its own jets to compete for the Delta order. Bombardier said it was confident that the ITC would find Boeing had not been harmed, calling the Department of Commerce decision a case of “egregious overreach”. Delta said the decision was preliminary and it was confident the ITC “will conclude that no US manufacturer is at risk” from Bombardier’s plane.

Australia next?! US?

• Canada Will Pay Compensation To Thousands Of Indigenous ‘Stolen Children’ (R.)

Canada will pay up to C$750m in compensation to thousands of aboriginals who were forcibly removed as children from their families decades ago, promising to end “a terrible legacy”. The move is the latest attempt by the Liberal government of the prime minister, Justin Trudeau, to repair ties with Canada’s often-marginalised indigenous population, which says it has been the victim of systemic racism for centuries. In the so-called “Sixties Scoop”, welfare authorities took about 20,000 aboriginal children from their homes between the 1960s and 1980s and placed them in foster care or allowed them to be adopted by non-indigenous families. The compensation package is designed to settle many of the lawsuits launched by survivors, who say the forced removal deprived them of their heritage and led to mental disorders, substance abuse and suicide.

“Language and culture, apology, healing – these are essential elements to begin to right the wrong of this dark and painful chapter,” said Carolyn Bennett, the federal minister in charge of relations with the indigenous population. Canada’s 1.4 million aboriginals, who make up about 4% of the population, experience higher levels of poverty and incarceration and have a lower life expectancy than other Canadians. They are often victims of violent crime and addiction. Indigenous activists complain Trudeau has broken repeated promises to improve their lives since taking office in late 2015. He reshuffled his cabinet in August to put more emphasis on helping aboriginal people. Bennett, at times fighting back tears, told a news conference she had heard “truly heartbreaking stories” about loss of identity and alienation.

Marcia Brown Martel, an aboriginal chief who led the campaign for compensation, lamented the “stealing of children” and noted some of those involved lived as far away as New Zealand. “Think of it as a puzzle, a great big puzzle. Pieces, people are missing,” she told reporters. [..] Trudeau and other Canadian leaders have already apologized for the many abuses committed over a 150-year period when 150,000 aboriginal children were forcibly separated from their parents and sent to church-run residential schools. In 2015, an official report said the schools were an attempt to end the existence of aboriginals as distinct legal, social, cultural, religious and racial entities in Canada.

A look at the future.

• FDP Chief Says Schaeuble ‘Not Tough Enough’ On Greece (K.)

The leader of Germany’s Free Democrats (FDP), Christian Lindner, seen as a likely successor at the finance ministry if his pro-business party enters a coalition with Chancellor Angela Merkel’s Christian Democrats (CDU), has criticized outgoing Finance Minister Wolfgang Schaeuble for not being tough enough on Greece. “Mr Schaeuble did not manage to impose himself over the chancellor in many questions of European policy. Just remember the third aid package for Greece, which he originally did not want to do,” Lindner told German daily Handelsblatt in an interview Friday. The 38-year-old politician managed to lead the FDP back into parliament after a four-year absence on the back of a pledge to limit financial perils from the eurozone and an illiberal assault on Merkel’s open-doors refugee policy.

In the same interview, Lindner called for the creation of an insolvency law for eurozone states, while arguing that countries should be able to leave the common currency area while remaining in the European Union. In May, the FDP chief said that Greece should leave the euro temporarily until its economy was back on track. If the Greek debt is not sustainable as the IMF claims, Lindner said at the time, then it has to be restructured – and this cannot take place within the eurozone. Lindner avoided to say if his party would push to take over the Finance Ministry. “For us a change in fiscal policy is more important than a new minister,” said Lindner, who also expressed doubts about the prospects of a three-way alliance between CDU, FDP and the Greens, known as the “Jamaica coalition.”

Due to lack of identity.

• Greece’s Ruling Syriza Party Falls Apart (K.)

An overwhelming majority of SYRIZA’s “Socialist Trend” faction under MEP Costas Chrysogonos have voted to part ways with the ruling leftists over differences in policy. In a ballot held on Friday, the proposal was backed by 1,678, or 82.6%, of the faction’s 2,032 members. Only 31 wanted to stay with SYRIZA. Officials said the faction will take steps to transform into an independent political grouping. They added that more details will be announced next week. Representatives of the faction also accused SYRIZA of turning into “a true replica of the centralized mainstream parties.”

“..four of the five island camps are hosting two or three times as many people as they were designed for..”

• Overcrowded Greek Refugee Camps Ill-Prepared For Winter: UNHCR (R.)

Greece must speed up winter preparations at refugee camps on islands in the Aegean Sea where there has been a sharp rise in arrivals, the United Nations refugee agency said on Friday. Nearly 5,000 refugees, mostly Syrian or Iraqi families, crossed from Turkey in September – a quarter of all arrivals this year, UNHCR data shows. While that is a fraction of the nearly 1 million who arrived in 2015 – due to a European Union deal with Turkey to block that route – four of the five island camps are hosting two or three times as many people as they were designed for. “UNHCR urges action on the islands to ease overcrowding, improve shelter, and stock and distribute appropriate and sufficient aid items,” said Philippe Leclerc, UNHCR representative in Greece.

In the Moria camp on the island of Lesbos, one of the main entry points, more than 1,500 people are in makeshift shelters or tents without insulation, flooring or heating, UNHCR said. They include pregnant women, people with disabilities, and very young children. On nearby Samos, about 400 people are living in “very difficult” conditions and another 300, including families and lone children, are sleeping in tents in the woods due to a lack of space in the camp, UNHCR said. More than 3,000 people on Samos are crammed into facilities designed to hold 700. In January, refugees in Greece suffered sub-zero temperatures when an icy spell gripped parts of the country and scores of summer tents were weighed down by snow. More than 60,000 refugees and migrants have been trapped in Greece since Balkan countries along the northward overland route to western Europe sealed their borders in March 2016.

UNHCR has been gradually reducing its involvement on the islands since national institutions took over most services in August.

Debt Rattle December 17 2016

Dec 172016

December 17, 2016 Posted by Raúl Ilargi Meijer at 10:14 am Finance Tagged with: China, cold war, debt, Fed, Greece, hysteria, JPMorgan, Jubilee, Obama, parity, Schaeuble 2 Responses »

Dorothea Lange Country filling station, Granville County, NC 1939

• Debt Nation: The Problem, the Solutions (Valentin Schmid)

• American Credit Card Debt Nears All Time Highs (BI)

• It’s Been A Nightmare Year For Australian Retail (News.com.au)

• Italy Prepares To Pump €15 Billion Into Ailing Banks (R.)

• Euro Parity With Dollar ‘Only A Matter Of Time’ – ING (CNBC)

• The Fed Is Pushing China Into A Messy Catch-22 (CNBC)

• China Vows To Contain Asset Bubbles, Avert Financial Risk In 2017 (R.)

• Cold War Hysteria vs. US National Security (Stephen F. Cohen)

• Obama Says Russia Is A Smaller, Weaker Country Than The US (CNBC)

• Obama Goes Off the Clinton Script (WSJ)

• Schaeuble Could Destroy Eurozone, Not Just Greece (EUO)

• Greek PM Tells Merkel ‘Wounds Of Crisis’ Must Be Healed (R.)

Excellent overview of debt-related issues. Steve’s Debt Jubilee warrants serious discussion at high levels. But it’s not happening.

• Debt Nation: The Problem, the Solutions (Valentin Schmid)

There are only two ways to wipe out debt if it cannot be repaid by increases in output. The worst for the economy, even though it may be the fairest, is bankruptcy and debt deflation or destruction. A company or an individual—and sometimes a government—just says it can’t repay its debt. The lender takes control of the assets, if there are any, and tries to recover as much of the loan as possible, making up for the shortfall with its capital provision. This is exactly what happened during the Great Depression, when companies and individuals defaulted in droves, driving thousands of banks into bankruptcy as well. “If you borrowed money to buy a house or a machine, you couldn’t repay the debt, no matter how productive you were. Deflation penalized producers who misjudged the value of their assets at the time,” said Oliver.

Private debt declined 20% from 1930 to 1933 but GDP declined 38%, so the debt-to-GDP ratio actually increased from 175 to 225%, according to data from Debt Economics. “Deflation can increase the level of private debt to GDP, because GDP falls faster than private debt. Paying down the debt, withdrawing money from circulation and reducing its velocity, reduces GDP more than the decline in the debt,” said Keen. So this exercise is best avoided, which is precisely what central banks did during the 2008 crisis with their QE programs and bank bailouts. They managed to avoid a second Great Depression, but they didn’t get rid of the private debt. Despite the evident flaws in a system that has provided incentives for borrowers and lenders to indulge in too much debt for their own good, there are creative ways to reset the system and at least get the economy growing again.

“Every debt collapse in history has had a combination of debt forgiveness and inflation. That is how debt problems are dealt with historically,” said Oliver. Western central banks have tried to create inflation through their QE programs but weren’t successful because of deflationary pressures: overcapacity in China, technological innovation, and the fact that their money printing ended up in the hands of financial actors, who bought a lot of stocks, rather than real people, who would repay debt and buy goods and services. Many economists, including Keen, therefore call for QE for the private sector, rather than the banks, a concept dubbed “helicopter money.” “The creative way to get around it, is use the government’s capacity to create money. You use the same power the central banks did with QE but pay it into private sector accounts rather than commercial bank accounts. Households and companies can use it to pay down debt and those who don’t have debt, can get a cash injection,” he said.

“..America’s putative economic strength might be a mirage [..] the economy may in fact be a lot weaker than all the happy indicators are leading people to believe.”

• American Credit Card Debt Nears All Time Highs (BI)

By most accounts, the American economy seems to be humming along very nicely. Unemployment just hit a nine-year low, the stock market this month climbed to all-time highs, and consumer confidence is as chipper as its been in two years. But at least one indicator suggests that much of the US is actually struggling financially: Americans are piling on credit card debt at record levels that we haven’t seen since the financial crisis. Households added $21.9 billion in credit card debt in the third quarter — the largest increase for that period since 2007 — bringing the amount of outstanding credit card debt to $927.1 billion, according to the latest study from WalletHub. That matches the mark in 2007 before the recession began, and it’s the highest tally since the end of 2008, when the global economy was experiencing a full-on implosion.

Racking up credit card debt isn’t inherently bad, so long as it’s being paid back. And so far, Americans are defaulting on their credit card debt at near historically low levels. Charge-off rates – the percentage of credit card debt that the companies are unable to collect on — are only at 2.86%, compared with 3.95% in 2007 the quarter before the Great Recession began and in excess of 10% in the years following the crisis, according to WalletHub. But holding a balance is a lousy move from a personal finance perspective — a sign of financial fragility. The fact that the average household with debt now owes $7,941 to credit card companies, according to WalletHub, suggests that America’s putative economic strength might be a mirage – that the economy may in fact be a lot weaker than all the happy indicators are leading people to believe.

Something’s off.

• It’s Been A Nightmare Year For Australian Retail (News.com.au)

It’s been a nightmare year for Australian retail, with a parade of the nation’s best-known brands decimated one after another. And experts say things will only get worse if business leaders and governments do not pick up their game. First it was Dick Smith Electronics, then the Woolworths-owned Masters home improvement chain that went under. Now, thousands more workers will be jobless at Christmas after a fresh slew of corporate collapses rounded out 2016. Payless Shoes this week announced plans to close its doors by the end of February, hot on the heels of Howards Storage World’s demise, and that of children’s fashion label Pumpkin Patch.

While Treasurer Scott Morrison seized on the latest bad news to bolster the Coalition’s tax reform agenda, market watchers say there is far more that needs to be done. Retail analyst Barry Urquhart of Marketing Focus said neither corporate leaders nor government had acknowledged what he called “an attitudinal recession” that was restraining businesses. While the nation was yet to tip into an official recession – despite having just marked its worst quarterly performance since the global financial crisis – Australians remained apprehensive about their futures, he said. And any business that failed to respond to this by recapturing the public imagination with a compelling, value-driven offering would simply fall by the wayside.

JPMorgan’s role is interesting. So is Beppe Grillo’s view of that role: “Italy’s opposition 5-Star Movement has called for JPMorgan’s fees to be voided if taxpayers have to come to the rescue..”

• Italy Prepares To Pump €15 Billion Into Ailing Banks (R.)

Italy’s government is ready to pump €15 billion into Monte dei Paschi di Siena and other ailing banks, sources said, as the country’s third-largest lender pushes ahead with a private rescue plan that is widely expected to fail. The world’s oldest bank has until Dec. 31 to raise €5 billion in equity or face being wound down by the European Central Bank, potentially triggering a wider banking and political crisis in Italy. If needed, the government will pump €15 billion into the Siena-based lender and several other smaller banks to prevent that, two sources close to the matter said on Thursday. One source said unlisted regional banks Banca Popolare di Vicenza and Veneto Banca, which were rescued this year by a state-backed fund, would also get support from the state.

The government would make the €15 billion available in a decree on Dec. 22, La Repubblica newspaper said on Thursday, adding that Banca Carige could also benefit. Italy’s banking sector is saddled with €356 billion of bad loans, around a third of the euro zone’s total and a legacy of the 2008-2009 global financial crisis when, unlike Spain or Ireland, Italy did not act to help its banks. Monte dei Paschi di Siena, advised by investment banks JPMorgan and Mediobanca, plans to raise equity to remove €28 billion in bad loans from its books. Italy’s opposition 5-Star Movement has called for JPMorgan’s fees to be voided if taxpayers have to come to the rescue. “We would have never done a deal like that with JPMorgan. In any case we would not pay the commissions (if the bank had to be nationalized,” Alessio Villarosa, a 5-Star lawmaker, said.

It’s not going to stop at parity.

• Euro Parity With Dollar ‘Only A Matter Of Time’ – ING (CNBC)

Divergence in monetary policy between the United States and Europe will bring parity between the value of the euro and dollar, according to ING. On Thursday the euro hit a low of 1.0364 against the dollar, the lowest level since August 2003 when it traded as low as 1.0357. Dollar strength is the key driver as investors believe the Federal Reserve will adopt a higher rate rise path in 2017 as the U.S. economy gathers momentum. Conversely, the ECB has just announced it will inject a further €540 billion of QE stimulus into the stuttering EU economy.

Analysts at ING wrote Friday that with European inflation struggling to edge higher and yesterday’s dip in to the 1.03 handle, euro/dollar parity is now firmly in view. “With the U.S. economy close to reaching escape velocity (and sustainable 2% inflation), it will only reinforce the downside risks to EUR/USD.” “Expect some consolidation around the 1.0450-1.0500 area, but this week’s fresh EUR/USD low means that the move down to parity is now only a matter of time,” the note reads.

“..either hike the interest rate (as) the U.S. does, or they give up the exchange rate..”

• The Fed Is Pushing China Into A Messy Catch-22 (CNBC)

An interest rate decision in the United States is causing a dilemma for Beijing. The U.S. dollar index surged to a near 14-year high after the Fed’s rate hike on Wednesday and its surprise forecast for three more increases — instead of the two that were expected previously — to come in 2017. Higher interest rates in the United States make it tempting for China to raise its own rates, because Beijing doesn’t want more money to flee the country into higher-yielding U.S. bonds. That flight also hurts China’s currency, the yuan. But Beijing could get its economy into trouble by hiking rates, since its continued economic growth is very heavily driven by borrowing. “You had this pressure that was already building, and the Fed has basically complicated and added to that with a more hawkish message,” said Logan Wright at Rhodium Group.

China’s yuan subsequently fell to its lowest level since 2008, and the country’s 10-year bond yield jumped to its highest level in more than a year. Declines in five-year and 10-year Chinese bond futures were reportedly so drastic Thursday that trade was halted due to a market trading limit. “The bond market itself, it’s raising a lot of attention, and it’s likely reflecting [that] policymakers in China are facing a difficult choice right now,” said Kai Yan, an economist at the IMF. He noted that “the speculation in the market is high because the central bank wants to stand in front of currency pressure to prevent capital outflow.” Chinese policymakers must “either hike the interest rate (as) the U.S. does, or they give up the exchange rate,” Yan said. “It is likely they will do a combination of the two.”

[..] China’s financial and economic challenges have been on the back burner for U.S. markets for much of the past year. The yuan’s depreciation versus the dollar has been largely ignored by global markets, as economic updates out of China have held up thanks largely to a flood of debt that’s propping up the country’s economy. Earlier this year, the Fed was seen as giving China some breathing room to stabilize its currency and economic growth. The U.S. central bank cited international concerns in avoiding a rate hike in the fall of 2015 and reducing its expectations for 2016 rate increases. Those decisions from the Fed helped keep the dollar steady, allowing China to avoid a significant depreciation of its currency. Now, however, some say the Fed may be less concerned about China since the U.S. economy is on firmer footing and can expect big domestic government spending from President-elect Donald Trump’s proposals.

“Houses are for people to live in, not for people to speculate..” Sounds nice, but real estate has been a major contributor to China’s economy and GDP.

• China Vows To Contain Asset Bubbles, Avert Financial Risk In 2017 (R.)

China will stem the growth of asset bubbles in 2017 and place greater importance on the prevention of financial risk, while keeping the economy on a path of stable and healthy growth, media said, citing leaders at an economic planning meeting. China has seen growth stabilize this year, but corporate leverage and credit continue to expand, increasing risks to the world’s second-largest economy as it looks to push forward structural reforms. The annual meeting is attended by China’s top leaders and is closely watched by investors for clues on policy priorities and main economic targets for the year ahead. Monetary policy will be kept “prudent and neutral” in 2017, leaders attending the Central Economic Work Conference said in a statement, as reported by the official Xinhua news agency on Friday.

“Monetary policy will be kept prudent and neutral, adapt to new changes in money supply … and strive to smooth monetary policy transmission channels and improve mechanism to help maintain liquidity basically stable,” they said. The People’s Bank of China has maintained a prudent monetary policy since 2011, raising or cutting interest rates in line with shifts in the economy. The pro-active fiscal policy has been in place since the depths of the global crisis. The property market will be a focus of risk control, as authorities will restrain property bubbles and prevent price volatility, they said. The leaders called for a strict limit on credit flowing into speculative buying in the property market and for a boost in the supply of land for cities where housing prices face stiff upward pressure. “Houses are for people to live in, not for people to speculate,” Xinhua said, citing the statement.

Cohen of course is America’s no. 1 expert on Russia.

• Cold War Hysteria vs. US National Security (Stephen F. Cohen)

Thus far, no actual facts or other evidence have been made publicly to support allegations that the hacking was carried out on the orders of the Russian leadership, that Russian hackers then gave the damaging materials to WikiLeaks, or that the revelations affected the electoral outcome. Nor are Russian President Putin’s alleged motives credible. Why would a leader whose mission has been to rebuild Russia with economic and other partnerships with the West seek to undermine the political systems of those countries, not only in America but also in Europe, as is charged? Judging by the public debate among Russian policy intellectuals close to the Kremlin, nor is it clear that the Kremlin so favored the largely unknown and unpredictable Trump.

But even if Putin was presented with such a possibility, he certainly would have understood that such Russian interference in the US election would become known and thus work in favor of Clinton, not Trump. (Indeed, a major tactic of the Clinton campaign was to allege that Trump was a “Putin puppet,” which seems not to have helped her campaign with voters.) Still worse, since the election these allegations have inspired a growing Cold War hysteria in the American bipartisan political-media establishment, still without any actual evidence to support them. One result is more neo-McCarthyite slurring of people who dissent from this narrative. Thus a New York Times editorial (December 12) alleges that Trump had “surrounded himself with Kremlin lackeys.” And Senator John McCain ominously warned that anyone who disagreed with his political jihadist vendetta against Putin “is lying.”

A kind of witch hunt may be unfolding, not only of the kind The Washington Post tried to instigate with its bogus “report” of scores of American websites said to be “fronts for Russian propaganda,” but at the highest level. Thus, Trump’s nominee for secretary of state is said to be “a friend of Putin” as a result of striking a deal for Exxon-Mobil for Russian oil reserves, something he was obliged to do as the company’s CEO. Several motives seem to be behind this bipartisan American campaign against the President-elect, who is being equated with Russian misdeeds. One is to reverse the Electoral College vote. Another is to exonerate the Clinton campaign from its electoral defeat by blaming that instead on Putin and thereby maintaining the Clinton wing’s grip on the Democratic Party. Yet another is to delegitimate Trump even before he is inaugurated. And certainly no less important, to prevent the détente with Russia that Trump seems to seek.

Obama sounds smaller and weaker here.

• Obama Says Russia Is A Smaller, Weaker Country Than The US (CNBC)

In his final news conference of the year, President Barack Obama emphasized that Russia cannot change or significantly weaken the U.S., adding that Russia is a smaller and weaker country. He said Russia’s economy “doesn’t produce anything that anybody wants to buy,” except oil, gas and arms. The only way Russia can affect the U.S., he said, is “if we lose track of who we are” and “abandon our values.” “Mr. Putin can weaken us just like he’s trying to weaken Europe if we start buying into notions that it’s OK to intimidate the press, or lock up dissidents or discriminate against people,” he said. When asked if he would specifically name Russian President Vladimir Putin as directly responsible for the election hacking, Obama said he wanted to give the intelligence community a chance to gather the information necessary.

He added, however, that “not much happens in Russia without Vladimir Putin,” reaffirming that the hacking happened at the highest levels of the Russian government. “This is a pretty hierarchical operation,” he said. “Last I checked, there’s not a lot of debate and democratic deliberation, particularly when it comes to policies directed at the United States.” Obama reaffirmed his message of political unity and bipartisanship, urging the country to reunite across party lines to defend itself against Russia and others. “Our vulnerability to Russia or any other foreign power is directly related to how divided, partisan, dysfunctional our political process is,” he said. “That’s the thing that makes us vulnerable.”

“His main complaint is that “I don’t think she was treated fairly” by the press corps and the Russian hacks became “an obsession that dominated the news coverage.”

• Obama Goes Off the Clinton Script (WSJ)

Hillary Clinton told her donor base at Manhattan’s Plaza Hotel on Thursday that Russian cyber attacks were both “a personal beef against me” and meant to undermine “the integrity of our democracy,” and Democrats fanned out this week to spread this Kremlin-hacked-the-election narrative. President Obama was asked about all this in his year-end Friday press conference, but even he couldn’t square the contradictions. As liberals assailed the legitimacy of Donald Trump’s victory, Mr. Obama defended “the integrity of our election system,” noting that there is no evidence that ballots weren’t counted fairly. So much for those Jill Stein, Clinton-endorsed recounts, or the conspiracies about compromised voting machines. The President also explained that the emails stolen from John Podesta and the Democratic National Committee were “not some elaborate, complicated espionage scheme.”

He said intelligence and law enforcement were “playing this thing straight” and disclosed sufficient information about the hacks for “the American public to make an assessment as to how to weigh that going into the election.” Mr. Obama conceded that some of the leaked content was “embarrassing or uncomfortable” but all in all “pretty routine stuff.” His main complaint is that “I don’t think she was treated fairly” by the press corps and the Russian hacks became “an obsession that dominated the news coverage.” Really? The Podesta and DNC emails mostly revealed that the Clinton apparat don’t much like conservative Catholics or Bernie Sanders. Mr. Trump’s offenses against beauty queen Alicia Machado in the 1990s and his Billy Bush video were far bigger stories. The emails that really harmed Mrs. Clinton were those she stored on a personal server as Secretary of State, because the arrangement was potentially criminal and underscored doubts about her political character and judgment.

Not could, will. Curious that Dijsselbloem’s solo act in deciding to halt Greek debt relief doesn’t get more attention.

• Schaeuble Could Destroy Eurozone, Not Just Greece (EUO)

The sudden suspension of Greece’s short-term debt relief measures on Wednesday evening (14 December) has sparked fierce criticism by a number of EU officials. EU commissioner Pierre Moscovici, European Parliament president Martin Schultz, French president Hollande and finance minister Michel Sapin, along with many MEPs from the GUE/NGL, S&D and the Greens groups, have echoed support for Greece and prime minister Alexis Tsipras’s decision to give a one-time relief package to low-income pensioners. In essence, there has been no official decision taken by the Eurogroup, the European Stability Mechanism (ESM), or the European Council. Instead, there’s been unilateral action from the head of the Eurogroup without prior coordination with his colleagues.

Creditors should respect their own part of the deal and conclude the second review of the bailout programme, and acknowledge that there are open issues that need be addressed. The Greek government is fully implementing the bailout deal, moving on to needed reforms, providing safety nets for the vulnerable social groups. It’s possible Tsipras’s announcement was brought about by German finance minister Schaeuble and other circles pushing Greece to the limit. But in truth, we need not investigate who has taken the decision but instead focus on substantial issues. These issues include lowering primary surplus targets after 2018 and loosening tax rates so that the economy can become stable and growth can reach sustainable levels.

Even with such strict deadlines, the Greek government has achieved all fiscal targets for 2016, increasing public income and reaching a higher primary surplus than expected. This positive development prompted Tsipras, a few days ago, to announce a one-time relief package for low-income pensioners; a substantive decision after 12 consecutive pension cuts between 2010 and 2014, a loss of more than 30% of national GDP, during the same period, with a considerable part of the population facing poverty and social exclusion. The Greek government’s urgent measures are the least this government can do to temporarily do something for the worse off.

Dimitrios Papadimoulis is vice president of the European Parliament and head of the Syriza party delegation.

Merkel sides with Schaeuble.

• Greek PM Tells Merkel ‘Wounds Of Crisis’ Must Be Healed (R.)

Greek Prime Minister Alexis Tsipras told German Chancellor Angela Merkel on Friday his country was set for strong economic growth and this would help to “heal the wounds of crisis” after years of austerity imposed under international bailouts. On a visit to Berlin, Tsipras was keen to emphasise Greek progress on reforms demanded by Germany as the EU’s most powerful economy and paymaster – a situation that has made Merkel a hate figure for some Greeks. The trip’s timing was also significant, as Greece wrangles with its creditors over terms for its current bailout, the latest of three. On Thursday it snubbed its lenders by passing legislation to give pensioners a one-off Christmas bonus.

Tsipras told reporters before meeting Merkel that he would inform the chancellor of the positive momentum of the Greek economy and his government’s “spectacular overachievement” of revenue targets. “The projections for the Greek economy are extremely positive for next year,” Tsipras said, adding authorities expected 2.7% growth in 2017 and 3.1% in 2018. But Greece’s economic development should not simply be confined to statistics and numbers, he added. “We want it to heal the wounds of crisis and to alleviate all those who have over these difficult years made huge sacrifices in the name of Europe,” Tsipras said.

Merkel showed little willingness to take a position on the disputed question of whether the pre-Christmas payout to pensioners was compatible with bailout obligations. Standing next to Tsipras, she said decisions lay in the hands of the Troika institutions handling negotiations with Greece but “the Greek prime minister’s assessment of the situation will certainly play a role in our discussions.” A German Finance Ministry spokesman said the institutions involved in Greece’s aid programme were critical of Athens in a preliminary report assessing the unilaterally announced measure. “To make the aid programme a success, it’s essential that measures are not decided unilaterally or are not taken back without advance notice,” said spokesman Dennis Kolberg.

Debt Rattle October 14 1015

Oct 142015

October 14, 2015 Posted by Raúl Ilargi Meijer at 8:43 am Finance Tagged with: China, debt, default, earnings, Goldman, JPMorgan, oil, recession, Russia, TTIP 6 Responses »

NPC Ford Motor Co. coal truck, Washington, DC 1925

• China Producer Prices Down -5.9%, 43rd Straight Month of Declines (Reuters)

• The Next China Default Could Be Days Away as Steel Firms Suffer (Bloomberg)

• CLSA Just Stumbled On The Bad Debt Neutron Bomb In China’s Banking System (ZH)

• Denominated In USD, The World Is Already In A Recession: HSBC (Zero Hedge)

• Citi’s Buiter: World Faces Recession Next Year (CNBC)

• JPMorgan’s Earnings Miss May Signal Gloomy Quarter for Banks (The Street)

• JPMorgan Misses Across The Board On Disappointing Earnings, Outlook (ZH)

• Goldman: This Is The Third Wave Of The Financial Crisis (CNBC)

• How Troubles in the Bond Market Could Impact Stocks: UBS (Bloomberg)

• Russia Abandons Hope Of Oil Price Recovery And Turns To The Plough (AEP)

• Oil Price Slide Means ‘Almost Everything’ Is For Sale (Bloomberg)

• Oil Unlikely To Ever Be Fully Exploited Because Of Climate Concerns (Guardian)

• Vladimir Putin Condemns US For Refusing To Share Syria Terror Targets (AEP)

• I Didn’t Think TTIP Could Get Any Scarier, But Then.. (John Hilary)

• Greek Corporate Profits Fell 86% In Five Years (Kath.)

• Goldman Entangled in Scandal at Malaysia Fund 1MDB (WSJ)

• #DeutscheBank Full Of Holes (Beppe Grillo)

• Solid Growth Is Harder Than Blowing Bubbles (Martin Wolf)

• 15 Reminders That China Is Completely Unpredictable (Michael Johnston)

• A German Manifesto Against Austerity (NewEurope)

• Rupert Murdoch Is Deviant Scum (Matt Taibbi)

• Half Of World’s Wealth Now In Hands Of 1% Of Population (Guardian)

China’s main export is now deflation. This comes on top of the deflation the west ‘produces’ on its own.

• China Producer Prices Down -5.9%, 43rd Straight Month of Declines (Reuters)

Consumer inflation in China cooled more than expected in September while producer prices extended their slide to a 43rd straight month, adding to concerns about deflationary pressures in the world’s second-largest economy. The consumer price index (CPI) rose 1.6% in September from a year earlier, the National Bureau of Statistics (NBS) said on Wednesday, lower than expectations of 1.8% and down from August’s 2.0%. In a sign of sluggish demand, the non-food CPI was even milder with an annual growth rate of 1.0% in September, the NBS data showed. The easing CPI was mainly due to a high comparison base last year, Yu Qiumei, a senior NBS statistician, said in a statement accompanying the data. CPI rose 0.5% month-on-month in September 2014, compared to a 0.1% growth last month.

Reflecting growing strains on Chinese companies from persistently weak demand and overcapacity, manufacturers continued to cut selling prices to win business. The producer price index (PPI) fell 5.9% from a year ago, in line with the expectations and the same rate of decline as in August, which was the biggest drop since the depths of the global financial crisis in 2009. “Overall, the still weak PPI highlights the severe overcapacity problem and sluggish domestic investment demand,” said economists at Nomura. “Given the lacklustre growth outlook, we continue to expect moderate fiscal stimulus from the central government and continued monetary easing.”

How to sum up Chinese economy: Overinvested in overcapacity.

• The Next China Default Could Be Days Away as Steel Firms Suffer (Bloomberg)

Another week, another Chinese debt guessing game. This time it’s the steel industry’s turn, as investors wonder if a potential bond default by Sinosteel Co. is an omen of things to come amid slowing demand for the metal used in everything from cars to construction. The state-owned steel trader, whose parent warned of financial stress last year, may have to honor 2 billion yuan ($315 million) of principal next Tuesday when bondholders can exercise an option forcing the notes’ redemption two years before they mature. If that should happen, China Merchants Securities thinks the firm will struggle to repay. A default would be the first by a Chinese steel company in the local bond market, which has had five missed payments this year, according to China International Capital Corp. Premier Li Keqiang is allowing more defaults to weed out the weakest firms as he seeks to rebalance a slowing economy.

Steel issuers’ revenue fell about 20% in the first half from a year earlier and over half of the firms suffered losses, according to China Investment Securities Co. “Sinosteel’s default risks are very high,” said Sun Binbin, a bond analyst at China Merchants Securities in Shanghai. “If there is no external help, its own financials won’t allow them to repay the bonds if investors exercise the option to sell.” China’s demand for steel will probably shrink 3.5% this year and another 2% in 2016 after consumption peaked in 2013, the World Steel Association said this week. That followed an Oct. 8 report from Xinhua saying that Haixin Iron & Steel Group, the largest private steel firm in north China, plans to restructure after filing for bankruptcy. “Given the serious overcapacity problem and fluctuations in commodity prices, more steel companies may have losses,” said Zhang Chao at China Investment Securities in Shenzhen. “More steel companies, including state-owned companies, may default.”

10% of Chinese bank loans are non-performing, i.e. need to be written down/off.

• CLSA Just Stumbled On The Bad Debt Neutron Bomb In China’s Banking System (ZH)

Over the weekend, Hong-Kong based CLSA decided to take this micro-level data and look at it from the top-down. What it found was stunning. According to CLSA estimates, Chinese banks’ bad debts ratio could be as high 8.1% a whopping 6 times higher than the official 1.5% NPL level reported by China’s banking regulator! As Reuters reports, the estimate is based on analysis of outstanding debts for more than 2700 A-share companies (ex-financials) and their ability to repay loans. Or in other words, if one backs into the true bad debt, not the number given for window dressing purposes by Chinese “regulators”, based on collapsing cash flows, what one gets is a NPL that is nearly 10% of all outstanding Chinese debt.

[..] If one very conservatively assumes that loans are about half of the total asset base (realistically 60-70%), and applies an 8% NPL to this number instead of the official 1.5% NPL estimate, the capital shortfall is a staggering $1 trillion. In other words, while China has been injecting incremental liquidity into the system and stubbornly getting no results for it leading experts everywhere to wonder just where all this money is going, the real reason for the lack of a credit impulse is that banks have been quietly soaking up the funds not to lend them out, but to plug a gargantuan, $1 trillion, solvency shortfall which amounts to 10% of China’s GDP!

What really counts: “Global trade is also declining at an alarming pace.”

• Denominated In USD, The World Is Already In A Recession: HSBC (Zero Hedge)

One of the things you might have noticed if you follow trends in global growth and trade, is that the entire world seems to be decelerating in tandem with China’s hard landing (which most recently manifested itself in another negative imports print). For evidence of this, one might look to the WTO, whose chief economist Robert Koopman recently opined that “it’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing.” And then there’s the OECD, which recently slashed its global growth forecasts. The ADB joined the party as well, citing China, soft commodity prices, and a strong dollar on the way to cutting its regional outlook. Even Citi has jumped on the bandwagon with Willem Buiter calling for better than even odds of a worldwide downturn.

Indeed, virtually anyone you talk to will tell you that the world looks to have entered a new era post-crisis that’s defined by a less robust global economy. Those paying attention will also tell you that this dynamic may well end up being structural and endemic rather than transitory. Earlier today, we noted that Credit Suisse’s latest global wealth outlook shows that dollar strength led to the first decline in total global wealth (which fell by $12.4 trillion to $250.1 trillion) since 2007-2008. Interestingly, a new chart from HSBC shows that when you combine the concepts outlined above, you learn that when denominated in USD, the world is already in an output recession.

Some color from HSBC: “We are already in a global USD recession. Global trade is also declining at an alarming pace. According to the latest data available in June the year on year change is -8.4%. To find periods of equivalent declines we only really find recessionary periods. This is an interesting point. On one metric we are already in a recession. [..] global GDP expressed in US dollars is already negative to the tune of USD1,37trn or -3.4%. That is, we are already in a dollar recession. We arrived at these numbers by converting global GDP into USD terms and then looking at the change in GDP. True, this highlights to a large extent the impact of a stronger dollar – which may be unfair, but the US dollar is still the world’s reference currency. However, it highlights that from a US perspective the global growth outlook is rather challenging. It also highlights how damaging a very strong dollar can be for global growth.

It already is.

• Citi’s Buiter: World Faces Recession Next Year (CNBC)

The global economy faces a period of contraction and declining trade next year as emerging nations struggle with tightening monetary policy, according to Citigroup’s Chief Economist Willem Buiter. Buiter reiterated his gloomy prediction at the Milken Institute London Summit on Tuesday, telling CNBC that China, Brazil and Russia are edging towards an economic downturn. “(The slowdown) is not confined to China by any means,” he said. “The policy arsenal in the advanced economies is unfortunately very depleted, debt is still higher in the non-financial sector than it was in 2007. So we are really sitting in the sea watching the tide go out and not really able to respond effectively to the way we should.”

Buiter predicts that global growth, at the market exchange rate, will fall below 2% and will lead to rising unemployment in many of the emerging markets, as well as a number of the advanced economies. He added that countries like the U.S. and the U.K. might not feel the full effects of a recession but said that global growth would be “well below trend” with a “widening output gap.” He said there would a whole range of other “dysfunctionalities” that have been building up since the global financial crash of 2008. Global markets were roiled in September after a devaluation of the yuan by Chinese authorities led to heavy bouts of volatility for mainland Chinese shares. Investors worldwide are growing increasingly concerned about slowing growth in the world’s second largest economy and question how a rate hike by the Fed could affect the international flow of capital.

Running out of gimmicks: “..the earnings expectations have been taken down so greatly that if you miss, you are going to be punished – particularly on the revenue numbers..”

• JPMorgan’s Earnings Miss May Signal Gloomy Quarter for Banks (The Street)

JPMorgan Chase posted lower profit than analysts estimated after revenue in both consumer and commercial banking businesses declined in the three months through September. The New York bank’s third-quarter profit of $1.32 a share lagged behind the $1.37 average estimate from analysts, while sales of $23.5 billion came in under an estimate of $23.7 billion. For finance companies, “the earnings expectations have been taken down so greatly that if you miss, you are going to be punished – particularly on the revenue numbers,” JJ Kinahan, chief market strategist with TD Ameritrade, said before the bank released its results.

Net revenue in the community banking unit dropped 4% to $10.9 billion, as sales declined in consumer banking and income dropped 6% in the card, commerce solutions and auto segment, the bank said in a statement. In commercial banking, revenue fell 3% to $1.6 billion amid tighter yields on loans and deposits and a decline in investment banking sales. JPMorgan was the first of the universal banks to report third-quarter earnings, and its performance may be an indication of how the others will perform, particularly in trading businesses. The bank’s equity-trading revenue climbed 9% while revenue from fixed income, currencies, and commodities trading declined 11% from a year earlier. The net result was a 6% drop in trading revenue for the quarter.

“Perhaps the US does not need NIRP: it appears banks like JPM are simply saying NO to deposits.”

• JPMorgan Misses Across The Board On Disappointing Earnings, Outlook (ZH)

Maybe we now know why JPM decided to release results after market close instead of, as it always does, before the open: simply said, the results were lousy top to bottom, the company resorted to its old income-generating “gimmicks”, it charged off far less in risk loans than many expected it would, and its outlook while hardly as bad as it was a quarter ago, was once again dour. First, the summary results, in which JPM saw $23.5 billion in non-GAAP net revenues, because yes, JPM has a pre-GAAP “reported revenue” item which was even lower at $22.8 billion… missing consensus by $500 million, down $1 billion or 6.4% from a year ago. While the Net Income at first sight seemed to be a beat, printing at $1.68, this was entirely due to addbacks and tax benefits, which amounts to a 31 cent boost to the bottom line, while for the first time, JPM decided to admit that reserve releases are nothing but a gimmick, and broke out the contribution to EPS, which added another $0.05 to the bottom line.

There were two surprises here: first, JPM’s legal headaches continue, and the firm spent another $1.3 billion on legal fees during the quarter – one assumes to put the finishing touches on the currency rigging settlement. Also, as noted above, instead of taking a credit charge, i.e., increasing reserve releases, JPM resorted to this age-old gimmick, and boosted its book “profit” by $450 million thanks to loan loss reserve releases, the most yet in 2015; ironically this comes as a time when JPM competitors such as Jefferies are taking huge charge offs on existing debt. It appears JPM is merely doing what Jefferies did for quarters, and is hoping the market rebounds enough for it to not have to mark its trading book to market.

While the release of reserves helped JPM in this quarter, unless the economy picks up substantially next quarter, JPM’s EPS will be hammered not only from the top line, but also from the long-overdue rebuilding of its reserves which will have to come sooner or later. Completing the big picture, was something rather troubling we first noticed last quarter: JPM’s aggressive push to deleverage its balance sheet, by unwinding billions in deposits. Indeed, as the bank admits, it has now shrunk its balance sheet by a whopping $156 billion in 2015, driven by a massive reduction in “non-operating deposits” of over $150 billion. Perhaps the US does not need NIRP: it appears banks like JPM are simply saying NO to deposits.

They’re right, but not for the right reasons.

• Goldman: This Is The Third Wave Of The Financial Crisis (CNBC)

Emerging markets aren’t just suffering through another market route, it’s a third wave of the global financial crisis, Goldman Sachs said. “Increased uncertainty about the fallout from weaker emerging market economies, lower commodity prices and potentially higher U.S. interest rates are raising fresh concerns about the sustainability of asset price rises, marking a new wave in the Global Financial Crisis,” Goldman said in a note dated last week. The emerging market wave, coinciding with the collapse in commodity prices, follows the U.S. stage, which marked the fallout from the housing crash, and the European stage, when the U.S. crisis spread to the continent’s sovereign debt, the bank said.

Concerns that the U.S. Federal Reserve would raise interest rates for the first time in nine years spurred a massive outflow of funds from emerging markets, including Asia’s, recently. But the Fed meeting on September 16-17 surprised markets by leaving rates unchanged and many analysts moved their forecasts for the next hike back into next year. That’s helped to stabilize hard-hit markets and currencies, but some analysts expect that’s just a temporary reprieve. One of the reasons Goldman is concerned about emerging markets is that lower interest rates globally have fueled credit growth and a debt buildup, especially in China, and that’s likely to impede future economic growth.

Goldman noted that downgrades for emerging market economic and earnings outlooks have spurred fears of a “secular stagnation” of permanently low interest rates and fading equity returns. But it added that those fears are overdone. “Much of the weakness in emerging markets and China is likely to reflect rebalancing of economic growth, rather than structural impairment,” it said. “While the adjustment is likely to take time (as it did in the U.S. and European Waves), it should lead to an unwinding of economic imbalances in time, providing the platform for ‘normalization’ in economic activity, profits and interest rates.” But when it comes to equity returns, Goldman doesn’t necessarily expect emerging markets will regain all their lost luster. “The fundamental shift in relative performance away from emerging-market to developed-market equity markets, and from producers (and capex beneficiaries) to consumers is likely to continue,” it said.

All down to liquidity. And deflation.

• How Troubles in the Bond Market Could Impact Stocks: UBS (Bloomberg)

Sell what you can, not what you want, goes the old markets adage. Analysts at UBS appear to have taken that strategy to heart with a new note detailing the stocks that could come under pressure in the event of a big squeeze in junk-rated bonds issued by companies with weaker balance sheets. The idea here is that the hybrid mutual funds carrying big portfolios of both debt and equities could be hard hit in the event of a long-awaited liquidity crunch that sparks turmoil in the corporate bond market. In that scenario, such funds might find themselves having to meet redemption requests by selling more liquid assets from their portfolios, such as stocks and U.S. Treasuries, as opposed to harder-to-trade corporate bonds.

In February we highlighted the risk that mutual funds were likely to be one means by which contagion from a sell-off in U.S. high yield would spread to other asset classes … Unlike the other two credit-equity links, which are a higher cost of capital for junk-rated heavily levered small caps and a general reduction in risk appetite, it turns out that the mutual fund link directly affects large-cap highly-rated equity. Here we go deeper into the question of exactly which equities are likely to be affected if the US high yield credit market suffers a liquidity crunch. Analysts Ramin Nakisa, Stephen Caprio and Matthew Mish point out that hybrid mutual funds and exchange-traded funds, “whose investors have no allegiance to asset class” now hold a sizable chunk of both bonds and equities. In fact, the breakdown of assets in this mercenary mutual funds looks something like this:

Russia can ‘rethink’ its economy. Saudi Arabia can not. Nor can North Dakota, or Alberta.

• Russia Abandons Hope Of Oil Price Recovery And Turns To The Plough (AEP)

Russia has abandoned hopes for a lasting recovery in oil prices, bracing for a new era of abundant crude as US shale production transforms the global energy market. The Kremlin has launched a radical shift in strategy, rationing funds for the once-sacrosanct oil and gas industry and relying instead on a revival of manufacturing and farming, driven by a much more competitive rouble. “We have to have prudent forecasts. Our budget is based very conservative assumptions of oil at around $50 a barrel,” said Vladimir Putin, the Russian president. “It is no secret that if the price goes down, investment peters out and disappears,” he told a group of investors at VTB Capital’s ‘Russia Calling!’ forum in Moscow.

The Russian finance minister, Anton Siluanov, said over-reliance on oil and gas over the last decade had been a fundamental error, leading to an overvalued currency and the slow death of other industries in a textbook case of the Dutch Disease. “We should stop caring so much about the oil industry and leave more space for others. We have to take very tough decisions and redistribute our resources,” he said. The new $50 benchmark for oil is even lower than the Russian central bank’s “extreme scenario” of $60 first prepared last year. The new realism has forced the Kremlin to ditch a raft of budget commitments and to stop topping up the pension reserve fund. Oil and gas taxes make up half the state’s revenue, and almost 70pc of Russia’s exports.

Igor Sechin, chairman of Russia’s oil giant Rosneft, accused the government of turning its back on the energy industry, lamenting that his company is being throttled by high taxes. He warned that the Russia oil sector will slowly shrivel unless there is a change of policy. Mr Sechin said Russia’s oil companies are already facing “negative free cash flow”. They face an erosion in output of up to 6pc over the next three years as the Soviet-era fields in Western Siberia go into decline. “You have to maintain investment,” he said Rosneft, the world’s biggest traded oil company, is facing taxes and export duties that amount to a marginal rate of 82pc on revenues. “This is enormous, it’s unbelievable. The attractiveness of the oil industry is all about tax rates,” he said. He stated caustically that the government cannot seem to make up its mind how to tackle the economic crisis, openly attacking ministers sitting next to him at the VTB Capital forum. “We have lots of models but unfortunately we are failing to see any actual growth,” he said.

2016 will see a lot of defaults.

• Oil Price Slide Means ‘Almost Everything’ Is For Sale (Bloomberg)

More than $200 billion worth of oil and natural gas assets are for sale globally as companies come under renewed financial pressure from the prolonged commodity price rout, according to IHS Inc. There are about 400 buying opportunities as of September, IHS Chief Upstream Strategist Bob Fryklund said in an interview. Deals will accelerate later this year and into 2016 as companies sell assets to meet debt requirements, he said. West Texas Intermediate crude has averaged about $51 a barrel this year, more than 40% below the five-year mean. Low prices have slashed profits and as of the second quarter about one-sixth of North American major independent crude and gas producers faced debt payments that are more than 20% of their revenue.

Companies have announced $181.1 billion of oil and gas acquisitions this year, the most in more than a decade, compared with $167.1 billion the same period in 2014, data compiled by Bloomberg show. “Basically almost everything is for sale,” Fryklund said Oct. 8 in Tokyo. “Low cycles are when a lot of these companies can rebalance their portfolios. In theory, this is when you upgrade your existing portfolio.” Companies with strong balance sheets are seeking buying opportunities, said Fryklund, citing Perth, Australia-based Woodside Petroleum Ltd.’s $8 billion offer for explorer Oil Search and Suncor’s $3.3 billion bid for Canadian Oil Sands. Both targets rejected initial offers.

We’ll blab again when push comes to shove. We’ll burn anything just to keep warm.

• Oil Unlikely To Ever Be Fully Exploited Because Of Climate Concerns (Guardian)

The world’s oil resources are unlikely to ever be fully exploited, BP has admitted, due to international concern about climate change. The statement, by the group’s chief economist, is the clearest acknowledgement yet by a major fossil fuel company that some coal, oil and gas will have to remain in the ground if dangerous global warming is to be avoided. “Oil is not likely to be exhausted,” said Spencer Dale in a speech in London. Dale, who chief economist at the Bank of England until 2014, said: “What has changed in recent years is the growing recognition [of] concerns about carbon emissions and climate change.” Scientists have warned that most existing fossil fuel reserves must stay in the ground to avoid catastrophic global warming and Dale accepted this explicitly.

“Existing reserves of fossil fuels – i.e. oil, gas and coal – if used in their entirety would generate somewhere in excess of 2.8trn tonnes of CO2, well in excess of the 1trn tonnes or so the scientific community consider is consistent with limiting the rise in global mean temperatures to no more than 2C,” he said. “And this takes no account of the new discoveries which are being made all the time or of the vast resources of fossil fuels not yet booked as reserves.” Dale said the rise of shale oil in the US, along with climate change concerns, meant a “new economics of oil” was needed. “Importantly, it suggests that there is no longer a strong reason to expect the relative price of oil to increase over time,” he said. The low oil price over the last year has led to billions of dollars of investment being cancelled.

The concept of ‘unburnable’ fossil fuels is closely linked to the idea of stranded fossil fuel assets – that reserves owned by companies will become worthless if the world’s nations act to tackle climate change. Analysis of these issues was pioneered by the Carbon Tracker Initiative (CTI), which warned in 2014 that $1trn was being gambled on high-cost oil projects that might never see a return. “As BP now recognises, there is a substantial risk in the system of ‘peak [oil] demand’,” said Anthony Hobley CEO of CTI. “This arises from a perfect storm of factors including ever cheaper clean energy, ever more efficient use of energy, rising fossil fuel costs and climate policy. These are key factors the industry has repeatedly underestimated.””

US and EU have no idea what to say or do. Oatmeal for brains.

• Vladimir Putin Condemns US For Refusing To Share Syria Terror Targets (AEP)

Russian leader Vladimir Putin has issued a caustic defence of his country’s bombing raids in Syria, accusing the West of stonewalling requests for help on terrorist targets and failing to grasp the basic facts on the ground. “We asked them to give us the information on the targets that they believe to be 100% terrorists and they refused to do that,” he said. “We then asked to please tell us which targets are not terrorists, and there was no answer, so what are we supposed to do. I am not making this up,” he told a VTB Capital forum of bankers and investors in Moscow. The US has accused the Kremlin of hitting enclaves of the Western-backed Free Syrian Army, and that its chief motive is to prop up a client regime in Damascus rather fighting the Jihadi extremists of Isil and al-Nusra.

Russia’s defence ministry said on Tuesday that its air force had struck 86 “terrorist” targets in Syria over the past 24 hours, the most intensive bombing since the campaign began two weeks ago. Mr Putin said there is no such thing as a secular resistance to president Bashar al-Assad in Syria, claiming that the US intelligence services and the Pentagon have wasted $500bn dollars on a largely fictious force. “Where is the free Syrian army,” he asked mockingly, alleging that munitions drops from the sky were falling into the hands of Isil, whatever the original intentions. “I think some of our partners simply have mush for brains. They do not have a clear understanding of what is really happening in the country and what goals they are seeking to achieve,” he said.

Mr Putin claimed the legal high ground, insisting that Russia is acting on the invitation of the Syrian authorities. “All our actions fully comply with the UN charter, contrary to the actions of our colleagues from the so-called US-led international coalition,” he said. Despite his pugnacious tone, Mr Putin appeared keen to play up the idea of a grand coalition of Russia and the West to defeat Isil. “I believe we have a common interest but so far co-operation has been military only,” he said. Mr Putin said Russian and US pilots are exchanging “friend\foe” signals to avoid dangerous incidents in the combat theatre. “It is a sign of mutual trust, but it is not enough,” he said, adding that he has offered to send a high-level mission to Washington led by premier Dmitry Medvedev to deepen ties – again receiving no answer.

“I do not take my mandate from the European people.”

• I Didn’t Think TTIP Could Get Any Scarier, But Then.. (John Hilary)

I was recently granted a rare glimpse behind the official façade of the EU when I met with its Trade Commissioner in her Brussels office. I was there to discuss the Transatlantic Trade and Investment Partnership (TTIP), the controversial treaty currently under negotiation between the EU and the USA. As Trade Commissioner, Cecilia Malmström occupies a powerful position in the apparatus of the EU. She heads up the trade directorate of the European Commission, the post previously given to Peter Mandelson when he was forced to quit front line politics in the UK. This puts her in charge of trade and investment policy for all 28 EU member states, and it is her officials that are currently trying to finalise the TTIP deal with the USA.

In our meeting, I challenged Malmström over the huge opposition to TTIP across Europe. In the last year, a record three and a quarter million European citizens have signed the petition against it. Thousands of meetings and protests have been held across all 28 EU member states, including a spectacular 250,000-strong demonstration in Berlin this weekend. When put to her, Malmström acknowledged that a trade deal has never inspired such passionate and widespread opposition. Yet when I asked the trade commissioner how she could continue her persistent promotion of the deal in the face of such massive public opposition, her response came back icy cold: “I do not take my mandate from the European people.”

So who does Cecilia Malmström take her mandate from? Officially, EU commissioners are supposed to follow the elected governments of Europe. Yet the European Commission is carrying on the TTIP negotiations behind closed doors without the proper involvement European governments, let alone MPs or members of the public. British civil servants have admitted to us that they have been kept in the dark throughout the TTIP talks, and that this makes their job impossible. In reality, as a new report from War on Want has just revealed, Malmström receives her orders directly from the corporate lobbyists that swarm around Brussels. The European Commission makes no secret of the fact that it takes its steer from industry lobbies such as BusinessEurope and the European Services Forum, much as a secretary takes down dictation.

Imagine that in the US, Germany, Japan, China. EU scorched earth tactics.

• Greek Corporate Profits Fell 86% In Five Years (Kath.)

Greek companies’ pretax profits have posted a dramatic 86% decline over the last five years, according to a survey of 4,997 firms by Grant Thornton. The profit slide for those companies added up to €5.3 billion in the period from 2009 to 2014, while their work forces shrank by 19% and their taxpaying capacity declined by 60%. The results of the survey were presented on Tuesday at Grant Thornton’s annual international conference, which was hosted in Athens for the first time, in the presence of Grant Thornton International head Edward Nusbaum.

The analysis of the survey’s findings showed a major drop in the operating profits of the sampled companies by 32% or €4.8 billion, in their net assets by €2.6 billion, and in their net borrowing by €7.5 billion: Total borrowing declined from €44.7 billion in 2009 to €37.3 billion last year. This drop is due to pressure from the credit sector for the repayment of loan obligations, which has resulted in a fall in the realization of new investments. The sectors with the highest debt burden are tourism, entertainment and information, fish farming, vehicle imports, food service etc.

FBI or Goldman. Who’s stronger?

• Goldman Entangled in Scandal at Malaysia Fund 1MDB (WSJ)

Goldman Sachs’s role as adviser to a politically connected Malaysia development fund resulted in years of lucrative business. It also brought exposure to an expanding scandal. As part of a broad probe into allegations of money laundering and corruption, investigators at the Federal Bureau of Investigation and the Justice Department have begun examining Goldman Sachs’s role in a series of transactions at 1Malaysia Development Bhd., people familiar with the matter said. The inquiries are at the information-gathering stage, and there is no suggestion of wrongdoing by the bank, the people said. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” a spokeswoman for the FBI said.

The widening scandal—investigators in five countries are now looking into 1MDB—highlights the sometimes risky path that Goldman has cut in emerging markets in search of faster growth. A few years before the Malaysia deals, Goldman did a series of controversial transactions with the Libyan Investment Authority that also brought unwelcome attention. The Libyan sovereign-wealth fund claimed in a lawsuit filed in 2014 in London that the bank took advantage of its unsophisticated executives to sell them complicated and ultimately money-losing investments. Goldman has said the claims are without merit. A trial in the suit is scheduled to begin next year.

The bank earned $350 million for executing nine trades for Libya, according to the investment authority. It earned far more from the Malaysian fund. The bank was consulted during 1MDB’s inception, advised it on three acquisitions and arranged the sale of $6.5 billion in bonds that alone brought in close to $600 million in fees, according to people close to the bank. 1MDB is now entangled in accusations of billions of dollars of missing money, putting it at the center of a political crisis for Malaysian Prime Minister Najib Razak, who oversees the fund. Malaysian government investigators earlier this year traced $700 million into Mr. Najib’s alleged bank accounts through agencies, banks and companies linked to 1MDB..

Remember, Beppe’s a trained accountant.

• #DeutscheBank Full Of Holes (Beppe Grillo)

“Two days ago, Deutsche Bank, a bank with assets worth more than Italy’s GDP, has declared the need to adjust the results for the third quarter of 2015 to reflect losses of almost €6 billion.

$70 thousand billion in derivatives Details of the reasons for these losses are not yet available but it is well known that the bank has an anomalous concentration of derivatives in its portfolio: $75 thousand billion (about €65 thousand billion!), equivalent to 20 times Germany’s GDP. It seems that Deutsche Bank has really not learned much from the 2008 crisis, even though America’s Securities Exchange Commission (SEC) in May of this year, penalised its structured finance dating back to the time of Lehman Brothers, with a fine of $55 million.

And yet Deutsche Bank passed the European Banking Authority’s stress tests without any particular censuring. However, the US stress tests carried out by the Federal Reserve before the summer, definitely found the German bank to have done badly and classed it among those that would not survive another financial crisis. So perhaps those that said the European stress tests put too much emphasis on the spread of the yield of government bonds among the various member countries, were not wrong. It’s a phenomenon that has become dangerously familiar to us, to such an extent that now, very few are aiming to tackle the root causes of the problems.

“High-income countries are already at or close to the zero lower bound on short-term interest rates. Their ability, or at least willingness, to act effectively in response to a large negative shock to demand is very much in question. ”

• Solid Growth Is Harder Than Blowing Bubbles (Martin Wolf)

It used to be said that when the US sneezed, the world economy caught a cold. This is still true. But now the world economy also catches a cold when China sneezes. It has lost its last significant credit-fuelled engine of demand. The result is almost certain to be a further boost to the global “savings glut” or, as Lawrence Summers calls it, “secular stagnation” – the tendency for demand to be weak relative to potential supply. This has big implications for global economic risks. In its latest World Economic Outlook , the IMFd strikes not so much a gloomy note as a cautious one. The world economy is forecast to grow by 3.1% this year (at purchasing power parity) and 3.6% in 2016. The high-income economies are forecast to grow by 2% this year, with growth at 1.5% even in the eurozone.

Emerging economies are forecast to grow 4% this year. This would be well below the 5% in 2013 or 4.6% in 2014. While China’s economy is forecast to grow by 6.8% and India’s by 7.3, Latin America’s is forecast to shrink by 0.3% and Brazil’s by 3%. So think of the world as a single economy. If it grows as forecast, it will probably be expanding at best in line with potential. But if a few of the things on the list were to go wrong, it would suffer rising excess capacity and disinflationary pressure. Even if nothing worse happened (and it easily could), it would still be a concern because room for policy manoeuvre is now quite limited.

Commodity-exporting and debt-burdened emerging countries will now have to retrench, just as crisis-hit eurozone countries had to a few years ago. Just as was the case in the eurozone, these economies look for external demand to pick them up. They may wait in vain. High-income countries are already at or close to the zero lower bound on short-term interest rates. Their ability, or at least willingness, to act effectively in response to a large negative shock to demand is very much in question. The same might even prove true of China.

Bit of humor.

• 15 Reminders That China Is Completely Unpredictable (Michael Johnston)

The Communist Party does not hesitate to implement bizarre rules and restrictions. Though opinions have become more divided in recent months, the general assumption among investors is that China maintains tremendous economic potential, and will become increasingly dominant in coming decades. There are plenty of good reasons for such an optimistic assumption, including numerous demographic tailwinds. But many investors fail to at least consider one obstacle facing the Chinese economy: the fact that it exists within a Communist State. Below are 15 reminders of just how unpredictable, illogical, and counterproductive a Communist government can be.

Reincarnation: In 2007, China banned Buddhist monks from reincarnating without government permission. According to State Religious Affairs Bureau Order N0. 5, applications must be filed by Buddhist temples before they can recognize individuals as reincarnated tulkus. This law deemed to be “an important move to institutionalize management of reincarnation.” In reality, it was widely seen as an attempt to limit the influence of the Dalai Lama, the exiled spiritual leader of Tibet. Buddhist monks living outside China are prohibited from seeking reincarnation, which effectively allows China to choose the next Dalai Lama. (The spiritual leader is believed to be able to control his own rebirth.)

Outside of China: About 44 million Americans believe that Bigfoot exists, and 16 million believe that Paul McCartney died in 1966 (and was secretly replaced by a lookalike). No permits or approvals are required for any of these beliefs.

Heathens!

• A German Manifesto Against Austerity (NewEurope)

The Foundation for European Progressive Studies has published the manifesto of fourteen high profile German economists, academics, policy advisors, leaders, and leaders signed a manifesto calling for a “European Europe” as opposed to a “German Europe.” Among them the Vice President of the World Health Organization, Detlev Ganten, Gustav Horn, of the German Institute of Economic Research (DIW), Heidemarie Wieczorek-Zeul, the former German minister for foreign aid, Dieter Spöri, the former Deputy Prime Minister and Minister of Economic Affairs of the State of Baden-Württemberg. Hailing from the social democratic family, they point to the Euro crisis and the danger of Brexit to call for the defense of the European Project. This is not the first critical voice in Germany against austerity politics.

However, this carries the weight of German economists that are very much part of the policy elite in Germany and the EU. What adds to their credibility is their attack on both Chancellor Angela Merkel, as well as the government’s junior partner, namely the SPD. They point towards a widening social cleavage, as the primary trigger of a rise in right Eurosceptic parties across Europe, including Germany. More profoundly, they point towards a German hegemonic project of austerity that is threatening to destroy Europe. In response to this challenge, they sign a 12 point manifesto. The manifesto is in many respects a personal attack on Chancellor Merkel, held responsible for the imposition of an austerity regime across Europe and accused of honing — along with Finance Minister Wolfgang Schäuble — a narrative of German domination reminiscent of the past century.

But, the manifesto is also an attack on the lack of a principled stand by the SPD. The economists accuse the Chancellor of a policy aimed at saving German and French banks, imposing the burden on the Greek population. The economists underscore that the austerity plan that has been imposed on Greece since 2010 is devoid of any theoretical or practical substance. They point towards a (German) policy impasse, calling for an investment-driven rather than austerity-driven strategy to avoid the final breakdown of the Greek economy. The SPD is being accused of tolerating if not conniving with “neoliberal” policies that they would have condemned had they been in opposition, including “pension cuts, unjust VAT increases, privatisation, the undermining of trade unions and free collective bargaining and an altogether reduction of the Greek demand, without which the country cannot get to its feet.”

“But in the end, Fox tells us, Obama will always be unable to control the envious, Christian-fearing, success-hating African Marxist Terrorist in control of his subconscious…”

• Rupert Murdoch Is Deviant Scum (Matt Taibbi)

It all comes back to Rupert Murdoch. As multiple recent news stories have proven, the 2016 presidential race is fast becoming a referendum on the News Corp CEO and reigning media gorgon. The two top candidates in the Republican field are a Fox News contributor (Ben Carson opened his Fox career two years ago comparing Obama to Lenin) and a onetime Fox favorite who is fast becoming the network’s archenemy: Donald Trump is the fallen angel in the Fox story, a traitor who’s trying to tempt away Murdoch’s lovingly nurtured stable of idiot viewers by denouncing their favorite “news” network as a false conservative God. The fact that Trump is succeeding with this message on some level has to be a source of terrible stress to Murdoch. He must be petrified at the prospect of losing his hard-won viewership at the end of his life.

This, in turn, might explain last week. Otherwise: what was Rupert Murdoch doing tweeting? Murdoch owns or controls print, cable and film outlets in so many places that his cultural and political views are fast becoming a feature of global geography. The sun never sets on his broadcast empire, a giant hovering Death Star that’s been firing laser cannons of “Rupert Murdoch’s Many Repellent Thoughts About Stuff” at planet Earth for decades now. Yet Murdoch apparently still doesn’t feel like he’s getting his point across. At 8:59 p.m. last Wednesday night, the 84 year-old scandal-sheet merchant had to turn to Twitter to offer his personal opinion on Ben Carson and the American presidential race. To recap: “Ben and Candy Carson terrific. What about a real black President who can properly address the racial divide?”

Forget for a minute what Murdoch said. Think about the why. Murdoch’s networks have already spent the last eight years hammering home this message to the whole world. Fox News has constantly presented Barack Obama as a mongrel, a kind of Manchurian President, raised in madrassas and weaned on socialism, who hates white people and yearns to euthanize them. The network spent years exhaustively building and tweaking Obama’s supervillain persona, almost always employing this Two-Face theme. The president in Fox lore is superficially a polite, intelligent, “articulate” American politician who sounds on the level. But in the end, Fox tells us, Obama will always be unable to control the envious, Christian-fearing, success-hating African Marxist Terrorist in control of his subconscious.

“..global wealth has fallen by $12.4tn in 2015 to $250tn..”

• Half Of World’s Wealth Now In Hands Of 1% Of Population (Guardian)

Global inequality is growing, with half the world’s wealth in the hands of just 1% of the world’s population, according to a new report which pointed to a rising discrepancy in prosperity in the UK. The report by Credit Suisse also found that there was a slowdown in the pace of growth of wealth of the middle classes compared with that of the very richest. “This has reversed the pre-crisis trend which saw the share of middle-class wealth remaining fairly stable over time,” said Tidjane Thiam, chief executive of the Swiss bank. A person needs only $3,210 (£2,100) to be in the wealthiest 50% of world citizens, $68,800 (£45,000) to be in the top 10% and $759,900 (£500,000) to earn a place in top 1%. Some 3.4 billion people – 71% of all adults in the world – have wealth below $10,000 in 2015.

A further 1 billion – 21% of the global population – fall in the $10,000-$100,000 (£6,560-£65,600) range. Each of the remaining 383 million adults – 8% of the population – has wealth of more than $100,000, including 34 million US dollar millionaires, who comprise less than 1% of the world’s adult population. Some 123,800 individuals within this group are worth more than $50m, and 44,900 have more than $100m. The UK has the third-highest number of these so-called ultra-high net worth individuals. The report concludes that global wealth has fallen by $12.4tn in 2015 to $250tn – the first fall since the 2008 banking crisis. This is largely a result of the impact of the strength of the dollar, the currency which is used as the basis for Credit Suisse’s calculations.

Debt Rattle January 6 2015

Jan 062015

January 6, 2015 Posted by Raúl Ilargi Meijer at 11:27 am Finance Tagged with: apocalypse, Brent, Ethiopia, euro, Greece, JPMorgan, lucky years, oil, Saudi 3 Responses »

DPC Unloading bananas, New Orleans 1903

• Oil Below $49 As Sector Faces Its ‘Hunger Games’ (CNBC)

• Brent Falls Below $52 As Oil Hits New Five And A Half Year Lows (Reuters)

• Oil Drama Drives Shares Lower In Asia And Europe (Reuters)

• Some Traders Are Betting On $20 Oil (MarketWatch)

• Caterpillar Is Latest Victim Of Sliding Oil Price (MarketWatch)

• Saudi Slashes Monthly Oil Prices To Europe; Trims US., Ups Asia (Reuters)

• Saudi Arabia Raises Price of Main Oil Grade for Asian Buyers (Bloomberg)

• Oil Below $55 May Force Norway to Cut Rates Again (Bloomberg)

• Oilfield Writedowns Loom as Market Collapse Guts Drilling Values (Bloomberg)

• Greece vs Europe: Who Will Blink First? (AEP)

• The Black Hole Theory Of The Eurozone (Coppola)

• As Goes Greece, So Goes the Euro (Bloomberg ed.)

• A New Year, A New Europe? Don’t Count On It (CNBC)

• Goldman Says JPMorgan Should Break Itself Into Pieces (Bloomberg)

• China Fast-Tracks $1 Trillion in Projects to Spur Growth (Bloomberg)

• Venezuelan Leader Maduro Seeks Economic Help On Tour (BBC)

• The Demise of UK’s Lucky Years Pits Winners Against Losers (Bloomberg)

• The Economics (and Nostalgia) of Dead US Shopping Malls (NY Times)

• Forecast 2015 – Life in the Breakdown Lane (Jim Kunstler)

• 2015: Grounds for Optimism (Dmitry Orlov)

• The People Pushed Out Of Ethiopia’s Fertile Farmland (BBC)

• Does CNN Really Have A Video Ready For The Apocalypse? (BBC)

“.. a dystopian post-apocalyptic future where the main protagonists battle each other to survive.”

• Oil Below $49 As Sector Faces Its ‘Hunger Games’ (CNBC)

Oil’s dramatic fall in price will have serious effects on revenues and spending in the sector, according to some industry analysts, with one investment firm predicting a sector-wide “recession” that will last for several years. Both U.S. crude and Brent futures fell to fresh 5-1/2-year lows on Tuesday, with the former slipping below $49. Weak global demand and booming U.S. oil production are seen as the key reasons behind the price plunge, as well as OPEC’s reluctance to cut its output. This sector slump will lead to a fight to the death for oil firms, according to analysts at Bernstein Research. The research firm likened the current environment to the Hollywood movie “The Hunger Games”, which portrays a dystopian post-apocalyptic future where the main protagonists battle each other to survive.

“Our research convinces us an oil services recession is largely unavoidable at even $80 a barrel…The Hunger Games have begun,” Nicholas Green, a senior analyst at the company, said in a note on Tuesday morning. Bernstein’s Green believes that offshore activity will also face a “structural recession.” He predicts that there will be only half of the new work available in 2015, compared to last year, and forecasts no material recovery before 2017. Other possible casualties of the sector’s struggle for survival are the high-risk and reward exploration and oil production companies (E&P), ratings agency Moody’s said Tuesday. If oil prices average $75 a barrel in 2015, then North American E&P companies would likely reduce their capital spending by around 20% from last year, according to Moody’s.

It could even be cut by 40% it oil starts at below $60 a barrel, it added. Oilfield services companies, or OFS, are companies that provide services to the E&P industry, and could face an earnings crunch of 12% to 17% if oil averages $75 a barrel in 2014, according to Moody’s. An average price below $60 a barrel in 2015 could drive earnings down by 25 to 30%, it added. Meanwhile, midstream operators – which are involved in the transportation of oil – would come under significant earnings pressure if this spending is cut, according to the ratings agency.

“When the Saudis are cutting prices, the markets are not going to go higher.”

• Brent Falls Below $52 As Oil Hits New Five And A Half Year Lows (Reuters)

Oil prices sank to fresh 5-1/2-year lows on Tuesday, extending losses after a 5% plunge in the previous session as worries over a global supply glut intensified. Brent crude fell by 3% to below $52 a barrel as cuts to monthly oil selling prices for European buyers by top OPEC producer Saudi Arabia heightened worries about oversupply. “Saudi Arabia is showing no signs of pulling back,” said Bjarne Schieldrop, chief commodity analyst with SEB in Oslo. “Stocks are continuing to build, and there is an increase in contango.” While Saudi Arabia increased its selling price to Asia, some analysts said the cuts to Europe reflect the kingdom’s deepening defense of market share. This added to bearish data over the weekend showing that Russia’s 2014 oil output hit a post-Soviet-era high and exports from Iraq, OPEC’s second-largest producer, reached their highest since 1980.

On Tuesday, the UAE’s Abu Dhabi National Oil Company set the December retroactive selling price for its benchmark Murban crude at $60.65 a barrel, its lowest level since May 2009. “It’s hard to pinpoint a specific downward pressure,” Schieldrop said. Brent crude fell as low as $51.23 a barrel on Tuesday, its lowest level since May 2009. It was trading at $51.31 at 0942 GMT (0442 ET), down $1.80. U.S. crude was at $48.54, down $1.50, after falling to $48.47, its lowest since April 2009. Jitters over political uncertainty in Greece added to an already faltering eurozone economy, raising questions about energy demand in Europe and compounding the bearish sentiment. A slew of factors was keeping up the downward pressure on prices, analysts said, pointing to concerns about the Greek economy, high oil output from Russia, Iraq and the United States, and a stronger dollar. “The weak euro should be one of the reasons,” said Tamas Varga of PVM, adding: “When the Saudis are cutting prices, the markets are not going to go higher.”

As I said yesterday, this oil thing is the real deal.

• Oil Drama Drives Shares Lower In Asia And Europe (Reuters)

European shares sank for a third day on Tuesday as a slide in oil prices showed no sign of easing off, supporting traditional safe-haven assets such as top-rated government bonds, the Japanese yen and the Swiss franc. Asian shares had slumped overnight after another day of drama on oil markets that drove U.S. crude to less than $50 a barrel for the first time since the first half of 2009 and handed Wall Street its worst losses in three months. The resulting bid for safety drove the average of yields on German, U.S. and Japanese 10-year debt to less than 1% for the first time. Also hit by a poor reading from a purchasing managers’ survey in Italy, all of Europe’s major exchanges were in negative territory an hour into morning trade.

“Global risk sentiment has been hurt by sliding stocks and oil prices. That is leading to a perception that there is a lack of demand and that has implications for global growth,” said Jeremy Stretch, head of currency strategy at CIBC World Markets. The FTSEuroFirst 300 index of leading shares, along with France’s CAC40 and Germany’s DAXI, were all down 0.8%. Britain’s oil and gas heavy FTSE index lost 1.3%. Japan’s Nikkei dropped 3%, its largest fall in almost 10 months while South Korean shares fell 1.7% to a 1-1/2-year low. Even high-flying mainland Chinese shares pulled back after hitting 5-1/2-year highs earlier in the session.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.4%. The slide in oil prices has shown little sign of abating in the new year, plunging as much as 6% on Monday as investors continue to reprice for broadly lower global demand and the impact of heavy U.S. shale drilling. Brent crude fell by another 1.5% to less than $53 after data showed Russian oil output at post-Soviet era highs and Iraqi oil exports near 35-year peaks. “Falls in oil prices are going beyond many people’s expectations. This will put pressure on the earnings of U.S. energy firms,” said Hirokazu Kabeya, senior strategist at Daiwa Securities in Tokyo.

“.. the pickup in interest in far out-of-the money calls is noteworthy for what it says about market psychology.”

• Some Traders Are Betting On $20 Oil (MarketWatch)

Here’s how bearish some traders are getting on oil these days. Even before Nymex WTI crude futures on Monday dipped below $50 a barrel in the latest stage of the crude rout, Stephen Schork, editor of the widely followed Schork Report, took note of trading in well out-of-the-money put options (puts give you the right, but not the obligation, to sell the underlying futures contract at a specific strike price). Unsurprisingly, open interest (the number of open contracts) in $50 strike-price puts on the February WTI futures contract had risen to 22,537 as of Friday’s close from 193 contracts at the beginning of December. Open interest on $45 puts rose from 8 to 36,113, while open interest in $40 puts rose from 1 to 9,864.

Here’s where it gets interesting: Open interest on $30 puts on the March futures contract rose to 2,127 from 34, while $30 puts on the June contract rose from 35 to 51,252. In addition, there has even been some light trading in June $20 puts, with open interest at 176 as of Friday’s close. “In other words, bets on sub-$30 crude oil in June are now 1.7 times greater than physical inventory at the Nymex terminal complex in Cushing,” Schork said in a note, referring to the Oklahoma delivery point for WTI oil. Of course, a trader can make money on a put even if the price of the underlying contract doesn’t fall below the strike price. The value of the option can rise as the price of the commodity declines. But the pickup in interest in far out-of-the money calls is noteworthy for what it says about market psychology.

Is it a sign that market sentiment has moved to an extreme, setting the stage for a rebound? The economics of the oil market are effectively “broken” and that’s left “psychology” to drive price action, Schork said. Even though the market is oversold according to technical measures, that’s been the case for the past three months, he said. “We could get a rebound to $70, but we could see $30 before we see $70, so why do you risk $20 to win $20,” he said. “So no picking the bottom here.”

All suppliers hurt. A lot.

• Caterpillar Is Latest Victim Of Sliding Oil Price (MarketWatch)

Caterpillar shares tumbled Monday as the company became the latest victim of the sliding price of oil. Caterpillar’s stock umbled almost 6% after J.P. Morgan downgraded it to underweight from neutral on concerns about the company’s direct exposure to oil and gas, and indirect exposure to mining, U.S. construction and emerging markets. The maker of diggers and dozers’ direct exposure to the sector is equal to about $6.5 billion, or 12% of revenue, while its indirect exposure may be as much as 15% of revenues, analysts wrote in a note. That means almost 30% of its total revenue is facing pressure in 2015 and 2016.

Caterpillar supplies turbines to offshore rigs, as well as reciprocating engines and transmissions for on-site drilling. It also provides construction equipment that is used in infrastructure development, along with aftermarket and other services. “Its indirect exposure may be greater than anticipated,” said the note. “Our analysis suggests that since 2010 U.S. construction equipment demand has been strongly correlated with the expansion of fracking and, as a result, we would expect to see a slowdown in equipment demand in 2015.” The North American construction market accounts for about 17% of Caterpillar’s revenue, and about 5% of its total revenue may be tied to oil and gas states.

Caterpillar also has exposure to Canadian Oil Sands, which is likely to experience a significant slowdown in demand. Emerging markets and the Middle East are other key markets that are expected to be hurt by the falling oil price. “Finally, the stronger dollar may also weigh on [Caterpillar’s] competitiveness against its international competitors and, given that senior executive compensation is based partly on market share, we would expect pricing to come under increasing pressure as we go forward,” said the note. Shares of the Dow Jones Industrial Average component have fallen 5.6% in the last three months, while the Dow has gained 2.9%.

This is how Reuters reports the Saudi move, scroll down to see how Bloomberg does it.

• Saudi Slashes Monthly Oil Prices To Europe; Trims US., Ups Asia (Reuters)

Saudi Arabia made deep cuts to its monthly oil prices for European buyers on Monday, a move some analysts said reflects the kingdom’s deepening defense of market share, although it also hiked prices in Asia from record lows. State oil firm Saudi Aramco cut the official selling price (OSP) for its Arab Light crude to Northwest Europe, a region that buys only a small proportion of Saudi Arabia’s crude, by $1.50 a barrel for February, putting it at a discount of $4.65 a barrel to the Brent Weighted Average (BWAVE), the lowest since 2009. However, Aramco also raised its February price for its Arab Light grade for customers for Asia – the largest of its major markets, accounting for more than half of its exported crude – by 60 cents a barrel versus January to a discount of $1.40 a barrel to the Oman/Dubai average.

The $2 discount to Asia in January was the largest in records going back more than a decade, but traders had been expecting Aramco to hike prices by at least 20 to 30 cents due to the narrowing spread in the Dubai market. The Arab Light OSP to the United States, the fifth consecutive monthly cut, was set at a premium of 30 cents a barrel to the Argus Sour Crude Index (ASCI) for February, down 60 cents from the previous month. The Kingdom’s move to cut its OSPs has been perceived by many traders as a signal of its decision to abandon efforts to shore up falling crude oil prices and, instead, focus on maintaining its share of key markets.

“The moves are reinforcing that the Saudis just don’t intend to do anything to rebalance (price) levels,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut. Benchmark Brent oil prices held on to earlier deep losses following the publication of the Saudi OSPs on Monday, trading at around $53.50 a barrel, down $3 on the day. Some analysts, however, have said they see the changes in monthly differentials as a simple reflection of deteriorating market conditions, not an indicator of policy. One trader said that the cuts to Europe may be a result of trying to price out West African barrels from Europe.

Bloomberg intentionally cherrypicks ithe headline, but does state in the article: “It decreased 11 prices globally and increased six ..” Journalism? You tell me.

• Saudi Arabia Raises Price of Main Oil Grade for Asian Buyers (Bloomberg)

Saudi Arabia raised the cost of its oil sales to Asia in February, prompting speculation the world’s biggest exporter is retreating from using record price discounts to defend market share. Saudi Arabian Oil will sell its Arab Light grade for $1.40 a barrel less than a regional average next month, the company said yesterday in a statement. That’s a narrowing from January, when the discount was $2, the biggest in at least 14 years. It decreased 11 prices globally and increased six. Brent oil fell 5.9% yesterday.

Oil prices collapsed 32% since OPEC decided to maintain its output target on Nov. 27, amid signs Saudi Arabia and other members are determined to let North American shale drillers and other producers share the burden of reducing an oversupply. When Aramco lowered prices for November it prompted speculation the nation was seeking to preserve market share. “They’re putting the brakes on a little bit,” Leo Drollas, a London-based independent consultant and former chief economist at the Centre for Global Energy Studies, said by phone. “It’s a little message that maybe prices are going down too far too quickly, and this is a little signal that they’re looking at things.”

Not doing so well.

• Oil Below $55 May Force Norway to Cut Rates Again (Bloomberg)

As oil drops below $55 a barrel, speculation is growing that the central bank of western Europe’s biggest crude producer will need to cut rates again. A 54% slump in Brent crude since a June high has pummeled the offshore industry in Norway, where oil and gas make up 22% of gross domestic product. Over the same period the krone has lost about 20% against the dollar and 8% against the euro. The OBX benchmark stock index is down about 12%. The central bank delivered a surprise rate cut last month it said was triggered by plunging crude prices. Since then the oil price development has proven even worse than the central bank anticipated. In an interview yesterday, Governor Oeystein Olsen said $55 oil is “clearly lower” than expected in December.

At Norway’s biggest bank, DNB, economists say Olsen will need to reduce rates again in June from 1.25%. “The weaker krone buys Norges Bank some time before they make another cut,” Kjersti Haugland, an analyst at DNB, said by phone. After lowering rates for the first time in almost three years on Dec. 11, Olsen said he sees a “50-50 chance” of more easing this year. Nordea Bank, Scandinavia’s biggest bank, says that means another two reductions, bringing the benchmark deposit rate to 0.75%. The central bank, which also oversees Norway’s $850 billion sovereign wealth fund, plans to provide more detail on how oil prices will shape its policy in March, Olsen said. Brent crude will need to trade above $70 a barrel before pressure on monetary policy abates, Olsen said in a Dec. 12 interview. Since then, the price of oil has dropped 14% to its lowest level in more than five years.

Slaughterhouse.

• Oilfield Writedowns Loom as Market Collapse Guts Drilling Values (Bloomberg)

Tumbling crude prices will trigger a flood of oilfield writedowns starting this month after industry returns slumped to a 16-year low, calling into question half a decade of exploration. With crude prices down more than 50% from their 2014 peak, fields as far-flung as Kazakhstan and Australia are no longer worth pumping, said a team of Citigroup analysts led by Alastair Syme. Companies on the hook for risky, high-cost projects that don’t make sense in a $50-a-barrel market include international titans such as Royal Dutch Shell and small wildcatters like Sanchez Energy. The impending writedowns represent the latest blow to an industry rocked by a combination of faltering demand growth and booming supplies from North American shale fields.

The downturn threatens to wipe out more than $1.6 trillion in earnings for producing companies and nations this year. Oil explorers already are canceling drilling plans and laying off crews to conserve cash needed to cover dividend checks to investors and pay back debts. “The mid-cap and small-cap operators are going to be hardest hit because this is all driven by their cost to produce,” said Gianna Bern, founder of Brookshire Advisory, who also teaches international finance at the University of Notre Dame. An index of 43 U.S. oil and gas companies lost about one-fourth of its value since crude began its descent from last year’s intraday high of $107.73 a barrel on June 20. The price dipped below $50 on Jan. 5, the lowest since April 2009.

The decline represents a $4.4 billion drop in daily revenue for oil producers, which equates to $1.6 trillion on an annualized basis, Citigroup researchers led by Edward Morse said in a Jan. 4 note to clients. The oil-market rout is exposing projects dating as far back as 2009 that were either poorly executed or bad ideas to begin with, Syme’s team said in a note to clients. Shell, Europe’s largest energy producer, may have as much as 5% of its capital tied up in money-losing projects. For U.K.-based BG Group, the figure could be as high as 8%, according to the Citi analysts. The biggest swath of asset writedowns probably will happen among U.S. explorers such as Sanchez, Matador and Clayton Williams that don’t have the same financial discipline as bigger producers such as Marathon Oil, Bern said.

Very true, Ambrose: “Mr Draghi can hardly agree to buy Greek bonds three days before the likely election of a party that has vowed to repudiate that same debt.”

• Greece vs Europe: Who Will Blink First? (AEP)

There is a whiff of 1914 to the latest Balkan showdown. Everybody thinks everybody else is bluffing, all of them betting that a calamitous chain reaction will be averted. In Germany, Der Spiegel reports that Angela Merkel thinks Greece can be ejected safely from the euro, if the rebel Syriza party wins the elections on January 25 and carries out its pledge to tear up Greece’s hated “memorandum” with the EU-IMF “Troika”. The German Chancellor’s team are blanketing the airwaves in what looks like a campaign to drive the threat home. “We are past the days when we still have to rescue Greece,” said Michael Fuchs, the parliamentary leader of Mrs Merkel’s Christian Democrats. “The situation has completely changed. It is entirely different from three years ago when we didn’t have the backstop defences in place. Greece is no longer ‘systemically relevant’ for the euro.” He added wickedly that the single currency might actually be stronger without the Balkan troublemaker.

It was revealed last week that Germany offered Greece a “friendly” return to the drachma in 2011. Months later, Mrs Merkel was prepared to eject Greece from EMU altogether. Tim Geithner, the former US Treasury Secretary, said the Europeans seemed determined to teach Greece a lesson: “They lied to us, and we’re going to crush them,” was the gist of it. Mrs Merkel retreated only after it became clear that Spain and Italy would be engulfed by contagion if Greece was thrown out. This time, Berlin seems almost eager to finish the job. Yet Syriza’s ice-cool leader, Alexis Tsipras, is equally convinced that the EU elites will back down, knowing that they have invested too much political capital in Greece’s salvation to walk away. After all, the sums involved now are tiny compared to the €245 billion in loans already dispersed since the crisis erupted in May 2010. Surely, after having claimed so confidently that the crisis was essentially over, Mrs Merkel can hardly admit that her strategy has failed?

Syriza itself is a neo-Marxist mélange, an ideological work in progress. Mr Tsipras no longer has a picture of Che Guevara in his office and has quickly mastered the Brussels vernacular – so much so that EU leaders and City economists presume, rightly or wrongly, that his rhetoric is just for domestic consumption. Yet the ultra-Left Aristeri Platforma still holds the biggest bloc of votes on Syriza’s central committee, and has stated that the movement must “be ready to implement its progressive programme outside the eurozone” if the EU refuses to yield. Mr Tsipras clearly wants Greece to remain in the euro. But he continues to insist on terms that negate that. He says: “We will cancel austerity. Under a Syriza government Greece will exit the bailout. This is not negotiable.” Twisting his knife into the German psyche, he wants the same level of debt relief – 50% – that Germany secured in 1953, which Greece signed up to despite the death of some 300,000 of its citizens under Nazi occupation.

“.. if markets have already priced in QE, why would actually doing QE make any difference?”

• The Black Hole Theory Of The Eurozone (Coppola)

Jean Pisani-Ferry tells the ECB to get a grip:

On the face of it, the ECB has many reasons to launch QE. For two years, inflation has consistently failed to reach the 2% target. In November, the annual price growth was just 0.3%, while the recent collapse in oil prices will generate further downward pressure in the coming months. Even more important, inflation expectations have started to de-anchor: forecasters and investors expect the undershooting of the target to persist over the medium term. Low inflation is already a serious obstacle to economic recovery and rebalancing within the eurozone. Outright deflation would be an even more dangerous threat.

So far, so good. Deflation risk is a legitimate reason for a central bank to loosen monetary policy. The ECB has already pushed funding rates close to zero and deposit rates into negative territory, as well as throwing money at banks and buying ABS and MBS in an attempt to get banks to lend. All this appears to have done is slow the rate at which M3 lending is falling (in a credit-money economy, I regard M3 lending as the best indicator of future NGDP growth). It’s hard to argue that the ECB has done anything like enough to counter deflationary pressures and restore growth. But I’m really not sure about this. He seems to think that the ECB must do QE because it has already been priced in by markets:

Should the ECB disappoint expectations, bond and foreign-exchange markets would confront an abrupt and damaging unwinding of positions: long-term interest rates would rise, stock markets would sink, and the exchange rate would appreciate.

A failure to deliver what markets expect is a central bank failure, is it? Really? More importantly, if markets have already priced in QE, why would actually doing QE make any difference? The price effects are already there, and yet M3 lending is falling, unemployment remains stubbornly high, manufacturing PMI is on the floor and so are inflation expectations. I can accept Pisani-Ferry’s argument that the ECB must now do QE because otherwise things will get much worse, but I can’t see how it is going to reverse the current deflationary trend unless it is far larger than the programme the market has already priced in. “Shock and awe” is needed. Where is the political will for this?

“Any country exiting the euro would throw the common currency’s continued existence into doubt.”

• As Goes Greece, So Goes the Euro (Bloomberg ed.)

German Chancellor Angela Merkel is said to view Greece’s exiting the euro as a manageable risk that would pose no existential crisis for the common currency. That opinion, if she indeed holds it, is misguided at best and dangerous at worst. It’s true that Greece poses a less naked financial risk to the rest of the euro region than it did in 2009, when revelations about the true size of its deficit triggered the ongoing crisis. Today, only about a fifth of Greek government debts are owed to the private sector, thanks to the country’s bailout by the European Union, the European Central Bank and the International Monetary Fund. And borrowing by Greek private companies accounts for less than 1% of loans made by Europe’s biggest banks, according to JPMorgan.

So it’s true that, if Greek elections later this month produce a new government prepared to default on its debts rather than continue with austerity, the financial repercussions will be limited. That says little, however, about the chaos that could accompany the country’s departure from the euro. Contagion is never predictable. Once inclusion in the euro is shown to be ephemeral – despite the EU treaty’s insistence that membership is “irrevocable” – then other of the currency’s weaker members will be vulnerable to speculation about their staying power. Investors may be driven to short the bonds of Italy, Portugal or Spain – no matter how strong the economic or political arguments against their leaving the currency union – driving their borrowing costs to levels they can’t afford.

To be sure, Der Spiegel’s report about Merkel’s intentions might not accurately reflect Germany’s attitude to a Greek exit. Joachim Poss, a German coalition lawmaker, said today that the consequences would be “incalculable.” And German government spokesman Steffen Seibert noted the region’s policy is “to stabilize and strengthen the euro area, the euro area with all of its members, including Greece.” Nevertheless, the mere discussion of a potential fracture in the euro zone should be a warning to European leaders that their path to ever-closer union is anything but assured. The euro has slumped to its weakest value against the dollar since 2006. Although there are other factors involved, it is a reminder that investors aren’t keen on putting their money into a currency with an uncertain future. Make no mistake: No matter how much some politicians might claim that they’ve contained a potential Greek crisis, they have not. Any country exiting the euro would throw the common currency’s continued existence into doubt.

“.. even if Draghi does unveil what the market is anticipating, the question is, will further easing measures be the solution to Europe’s economic malaise?

• A New Year, A New Europe? Don’t Count On It (CNBC)

A new year is upon us and that means investors will take a fresh look at European stocks. Unfortunately, Europe’s gloomy picture hasn’t changed. Not enough growth. Inflation is too low. And unemployment is still too high in parts of Europe. Enter stage right: Mario Draghi. Arguably the most powerful European official, investors are betting on the European Central Bank President to unveil a full-blown program of quantitative easing to stimulate the region’s stagnant economy. “Will the ECB join in the fun? If yes – then that should bring stability to the Eurozone and help investors feel better – if not then watch out as global markets [to] adjust,” said Kenneth Polcari, Director at O’Neil Securities. The decision on full blown QE could come at the next governing council meeting on January 22th.

If the ECB does not join the party, then markets could be set for a steep decline. Already financial markets have been moving on the expectation that Draghi will deliver the goods. But if this is a classic –overpromise and underdeliver – something Draghi is quite good at, then traders say expect markets to react negatively. But even if Draghi does unveil what the market is anticipating, the question is, will further easing measures be the solution to Europe’s economic malaise? Sure, it worked in the U.S. but does that mean it will work in Europe? Some traders say no. An economic recovery takes more than just quantitative easing. Each individual economy needs to work on structural reform – policies to help revive their own respective countries. And while each country says it’s working on a plan – some analysts say more work can be done.

Less reliance on ECB and more action from individual country leaders is needed, they say. Despite what is most likely going to be a slow and drawn-out path to recovery, there are some investors who are bullish on Europe. In fact, Morgan Stanley writes that it is positive on European equities for 2015. Analysts there expect a pick-up in economic momentum, and 10% earnings per share (EPS) growth. One of the factors that should help earnings this year is a weaker euro. The single currency is currently trading at a multi-year low against the US dollar. “A key component in our 10% EPS forecast is the likely currency tailwinds that European companies will enjoy next year. Our foreign exchang strategists expect EUR/USD to reach 1.12 by the end of 2015,” writes Graham Secker, Morgan Stanley’s Chief European Equity Strategist.

All big banks should be broken up.

• Goldman Says JPMorgan Should Break Itself Into Pieces (Bloomberg)

JPMorgan Chase’s parts are probably worth more to investors than the whole after regulators proposed tougher rules penalizing firms for size and complexity, according to Goldman Sachs. JPMorgan could unlock value by splitting its four main businesses or dividing into consumer and institutional companies, Goldman Sachs analysts led by Richard Ramsden wrote today in a research note. Units of New York-based JPMorgan trade at a discount of 20% or more to stand-alone peers, they wrote. “Our analysis suggests that a breakup into two or four parts could unlock value in most scenarios, although the range of outcomes we assessed is wide, at 5% to 25% potential upside,” the analysts wrote. The move would reverse much of Chief Executive Officer Jamie Dimon’s work since taking over JPMorgan in 2006.

Under Dimon, 58, the firm grew to become the largest U.S. lender by assets and the world’s biggest investment bank after acquiring ailing firms during the 2008 financial crisis. Dimon has said the firm’s size creates opportunities to cross-sell products and better serve clients. “Each of our four major businesses operates at good economies of scale and gets significant additional advantages from the other businesses,” Dimon wrote in a letter to shareholders last year. “This is one of the key reasons we have maintained good financial performance.” The logic of a breakup would rely on the consumer business, commercial bank, investment bank and asset management unit being valued closer to so-called pure-play financial companies, the Goldman Sachs analysts wrote.

The parts probably could operate with lower capital levels as stand-alone firms, resulting in higher returns on equity, they wrote. The maneuver would risk some of the $6 billion profit JPMorgan says it makes tied to synergies between businesses, though a split into halves would preserve much of those benefits, the analysts wrote. The Federal Reserve laid out a plan last month that may require JPMorgan to add more than $20 billion to its capital by 2019. The rules could get even stricter, prompting banks to consider new business models, the Goldman Sachs analysts wrote. “JPMorgan – and other money centers – would strongly consider strategic alternatives, providing shareholders with a breakup ‘put option’ if capital requirements get tougher,” they wrote.

It’s going to need the shadow banking system to make this work, the very same it’s trying to curb.

• China Fast-Tracks $1 Trillion in Projects to Spur Growth (Bloomberg)

China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year as policy makers seek to shore up growth that’s in danger of slipping below 7%. Premier Li Keqiang’s government approved the projects as part of a broader 400-venture, 10 trillion yuan plan to run from late 2014 through 2016, said people familiar with the matter who asked not to be identified as the decision wasn’t public. The National Development and Reform Commission, which will oversee the projects, didn’t respond to a faxed request for comment. The move illustrates concern among officials that China’s planned shift to a domestic-consumption driven economy has yet to produce enough growth momentum.

The yuan rose, halting a two-day decline, and Australia’s dollar – a proxy for China – climbed after the news. “It’s part of China’s efforts to stabilize growth, and the news will help to boost market confidence,” said Julia Wang, a Hong Kong-based economist with HSBC. “Infrastructure investment will continue to be a major driver for China’s economic growth.” The approvals contrast with past moves to boost growth via infrastructure in which the government gave the green-light to projects individually. They are part of efforts to respond to weak output, according to the people. The projects will be funded by the central and local governments, state-owned firms, loans and the private sector, said the people.

The investment will be in seven industries including oil and gas pipelines, health, clean energy, transportation and mining, according to the people. They said the NDRC is also studying projects in other industries in case the government needs to provide more support for growth. The NDRC’s spokesman, Li Pumin, said last month China would encourage investment in those areas. The Economic Observer newspaper reported Dec. 26 on its website that an official from the NDRC’s Zhejiang provincial bureau said the government had approved more than 420 infrastructure projects needing investment of more than 10 trillion yuan.

China will step in.

• Venezuelan Leader Maduro Seeks Economic Help On Tour (BBC)

Venezuelan President Nicolas Maduro is beginning an international tour to try to stem the impact of falling oil prices and a deepening recession. Mr Maduro goes first to China – a major source of loans for Venezuela – for talks with the Chinese President, Xi Jinping. He will then travel to various Opec member countries to press for cuts in oil output that would boost prices. Venezuelan oil prices have dropped by half since June. The country gets most of its foreign currency from oil exports and is estimated to have the largest oil reserves in the world. Before he left Venezuela Mr Maduro announced a number of new mechanisms aimed at addressing the country’s economic crisis.

He said he would create a strategic reserve, appoint a new board to run the organisation that manages currency exchange controls, and create new agencies to manage the distribution of commodities. President Maduro has said his country is suffering the consequences of an economic war launched by US President Barack Obama “to destroy” the oil producers’ cartel, OPEC. He has also accused the US of flooding the markets with oil as part of an economic war against Russia. The Venezuelan opposition blames the country’s economic crisis and shortages of many staples, such as corn oil and milk, on the socialist policies of Mr Maduro and his late predecessor, Hugo Chavez.

“Across the U.K., real weekly earnings – adjusted for inflation – dropped by 10.3% on average between 2008 and 2014 ..”

• The Demise of UK’s Lucky Years Pits Winners Against Losers (Bloomberg)

Out shopping one winter weekday morning in the southern English town of Eastleigh, 58-year-old Steve Fryer has reason to smile. Hired at 16 by J Sainsbury Plc, he stayed with the retailer for four decades, ascending from the shop floor to management. With a pension that generates more than his final salary at retirement two years ago, he’s paid off his mortgage, owns a second home in a nearby coastal resort and is helping the last of three daughters on to the property ladder. Asked if he could secure the same prosperity starting out today, Fryer shakes his head. “I got through by hard work, but I was also working in the lucky years,” he says. “I don’t see a light at the end of the tunnel for the younger ones.” It’s an indictment heard across the U.K. four months from a general election that threatens to redraw the British political landscape.

As Prime Minister David Cameron campaigns for a second term on the U.K.’s economic recovery, his chances of re-election are undermined by a sense that things aren’t getting better for many voters after more than 4 1/2 years of austerity under the Conservative-led coalition. Take John Harcourt. At 21, he’s hunting for work in Eastleigh to lift him off welfare benefits before he goes to university later this year. He’s chosen to study motor-vehicle engineering, in part to avoid what he says is a lackluster labor market and to secure the skills he thinks he’ll need if he’s to find long-term employment. “It’s very difficult as there’s just not much turnover in jobs,” he says. “I’m happy to do anything. I’d do administration, retail, flip burgers.” You don’t have to walk far in Eastleigh, a town of about 125,000, to run into the two faces of the modern-day British economy.

Those at the end of their work life with a pension and property are coping with the tepid recovery from the 2008-2009 recession, while those starting out struggle to be hired, then face low wage growth once they have a job. Across the U.K., real weekly earnings – adjusted for inflation – dropped by 10.3% on average between 2008 and 2014, according to the Office for National Statistics. The opposition Labour Party says that equates to the biggest drop in real incomes since the time of Queen Victoria and the advent of industrialization more than a century ago. [..] Four years since Cameron declared “we’re all in this together,” the economic divide is not simply geographical but increasingly defines the country. While the government boasts of the fastest economic growth of any major developed nation, an Ipsos MORI poll in November found that eight in 10 Britons say they’ve felt little, if any, impact on their standard of living. [..]

I’ve always thought that if a community’s center evolves around shopping, it has negative value.

• The Economics (and Nostalgia) of Dead US Shopping Malls (NY Times)

Inside the gleaming mall here on the Sunday before Christmas, just one thing was missing: shoppers. The upbeat music of “Jingle Bell Rock” bounced off the tiles, and the smell of teriyaki chicken drifted from the food court, but only a handful of stores were open at the sprawling enclosed shopping center. A few visitors walked down the long hallways and peered through locked metal gates into vacant spaces once home to retailers like H&M, Wet Seal and Kay Jewelers. “It’s depressing,” Jill Kalata, 46, said as she tried on a few of the last sneakers for sale at the Athlete’s Foot, scheduled to close in a few weeks. “This place used to be packed. And Christmas, the lines were out the door. Now I’m surprised anything is still open.” The Owings Mills Mall is poised to join a growing number of what real estate professionals, architects, urban planners and Internet enthusiasts term “dead malls.”

Since 2010, more than two dozen enclosed shopping malls have been closed, and an additional 60 are on the brink, according to Green Street Advisors, which tracks the mall industry. Almost one-fifth of the nation’s enclosed malls have vacancy rates considered troubling by real estate experts — 10% or greater. Over 3% of malls are considered to be dying — with 40% vacancies or higher. That is up from less than 1% in 2006. Premature obituaries for the shopping mall have been appearing since the late 1990s, but the reality today is more nuanced, reflecting broader trends remaking the American economy. With income inequality continuing to widen, high-end malls are thriving, even as stolid retail chains like Sears, Kmart and J. C. Penney falter, taking the middle- and working-class malls they anchored with them.

“It is very much a haves and have-nots situation,” said D. J. Busch, a senior analyst at Green Street. Affluent Americans “will keep going to Short Hills Mall in New Jersey or other properties aimed at the top 5 or 10% of consumers. But there’s been very little income growth in the belly of the economy.” At Owings Mills, J. C. Penney and Macy’s are hanging on, but other midtier emporiums like Sears, Lord & Taylor, and the regional department store chain Boscov’s have all come and gone as anchors. Having opened in 1986 with a renovation in 1998, Owings Mills is young for a dying mall. And while its locale may have contributed to its demise, other forces played a crucial role, too, like changing shopping habits and demographics, experts say. “I have no doubt some malls will survive, but major segments of our society have gotten sick of them,” said Mark Hinshaw, a Seattle architect, urban planner and author.

“Stock buybacks boost share prices, of course, but they don’t represent any real increased value in a given company. They’re just snakes eating their own tails.”

• Forecast 2015 – Life in the Breakdown Lane (Jim Kunstler)

As 2014 closed out, that kit-bag of frauds, swindles, Ponzis, grifts, bait-and-switches, and three-card-monte scams is looking at least as wobbly as it did in 2007 when Wall Street was busy manufacturing booby-trapped MBSs and CDOs. Except we know the true aggregate risk at stake has only grown larger and more hazardous due to all the strenuous efforts by authorities since the panic of 2008 to evade any natural process for clearing mal-investment and debt gone bad. A lot of that stank was simply shoveled into the Federal Reserve’s basement, where it sits to this day, composting steamily. As to be expected (and averred to in my previous books and blogs) financial repression, market intervention, and statistical distortion will produce ever more financial perversity.

That is the hazard in decoupling truth from reality. Imposed dishonesty will always express itself in unexpected ways. Who expected the price of oil to fall by nearly half in a few months? These days, perversity expresses itself in a morbidly obese dollar gorging on junk while bulimic currencies elsewhere projectile-vomit their value away as the economies attached to them die of malnutrition. Perhaps this comes as a surprise to central bankers standing at their control panels like recording engineers at the soundboard, tweaking all the dials and slides expecting to achieve a perfect repressive inflation rate of 2%+ so they can melt away the onerous debt of sovereign balance sheets and Too Big To Fail banks — incidentally squeezing the citizenry of purchasing power in small annual increments that add up, after a while, to worthless money.

They did manage to extend the inflation of stock market indexes another year, which the public is supposed to interpret as “prosperity.” Half a trillion dollars in stock buybacks of S&P companies were executed in 2014, much of it done with money, i.e. “leverage,” borrowed at zero interest. Stock buybacks boost share prices, of course, but they don’t represent any real increased value in a given company. They’re just snakes eating their own tails.

“3. The United States is still quite powerful and can cause massive damage on its way down.”

• 2015: Grounds for Optimism (Dmitry Orlov)

To my mind, the really interesting development of 2014 is that the world as a whole (with a few minor exceptions) has become quite lucid on the topic of what the United States, as a global empire, is and stands for. It is now very commonly and completely understood that: 1. The United States is an evil empire, attempting not so much to rule the world as to disrupt it to its short-term advantage, 2. The United States is failing, as an empire and as a country, and no amount of fraud, mayhem, torture and murder is going to save it, 3. The United States is still quite powerful and can cause massive damage on its way down. This damage must be contained, while plans are drawn up for an international arrangement that will arise upon its demise.

Looking back on 2013 and before, such sentiments were already being expressed, but on the fringes and quietly. The difference is that in 2014 they became commonplace knowledge, and their expressions thundered from presidential podiums. What’s more, there just isn’t that much of a counterargument being voiced. I don’t hear a single voice out there arguing that the US is a benevolent force that is on the up-and-up, would never hurt a fly and is the permanent center of the universe. Yes, some people can still think that, but it’s hard to see value in such “thought.” There are still a few holdouts: the UK, Canada and Australia especially. But even there the true picture is being distorted because of their Murdockified national media.

Judging from what I hear from the people there, they are almost uniformly nauseated by the subservient pro-US antics of their national leaders. As for the EU, the image of political uniformity presented by Brussels is largely a fiction. In the core countries of Western Europe, business leaders are almost uniformly in favor of close cooperation with Russia and against sanctions. Along the fringe, entire countries appear to be on the verge of switching sides. Hungary—never a friend of Russia—now seems more pro-Russian than ever. Bulgaria, which has had a love/hate attitude toward Russia for centuries now, seems to be edging back closer to love. Even the Poles are scratching their heads and wondering if close cooperation with the US is in their national interest.

Another major shift I have observed is that a significant percentage of the thinking people in the US no longer trusts their national media. There is a certain pattern to the kinds of messages that can go viral and spread wildly via tweets and social media. Fringe messages must, by definition, stay on the fringe. And yet last year something snapped: a few times I ran a story in an attempt to plug a gaping hole in the US mass media’s coverage of events in the Ukraine, and the response was overwhelming, with hundreds of thousands of new readers showing up. What’s more, a lot of them have kept coming back for more. I take this to mean that what I have to say, while by no means mainstream, is no longer on the fringe, and that bloggers have an increasingly important role in helping plug the giant holes in national media coverage.

We’ll keep going till there’s nothing left.

• The People Pushed Out Of Ethiopia’s Fertile Farmland (BBC)

The construction of a huge dam in Ethiopia and the introduction of large-scale agricultural businesses has been controversial – finding out what local people think can be hard, but with the help of a bottle of rum nothing is impossible. After waiting several weeks for letters of permission from various Ethiopian ministries, I begin my road trip into the country’s southern lowlands. I want to investigate the government’s controversial plan to take over vast swathes of ancestral land, home to around 100,000 indigenous pastoralists, and turn it into a major centre for commercial agriculture, where foreign agribusinesses and government plantations would raise cash crops such as sugar and palm oil. After driving 800km (497 miles) over two days through Ethiopia’s lush highlands I begin my descent into the lower Omo valley.

Here, where palaeontologists have discovered some of the oldest human remains on earth, some ancient ways of life cling on. Some tourists can be found here seeking a glimpse of an Africa that lives in their imagination. But the government’s plan to “modernise” this so-called “backward” area has made it inaccessible for journalists. As my jeep bounces down into the valley, I watch as people decorated in white body paint and clad in elaborate jewellery made from feathers and cow horn herd their cows down the dusty track. I arrive late in the afternoon at a village I won’t name, hoping to speak to some Mursi people – a group of around 7,000 famous for wearing huge ornamental clay lip plates. The Mursi way of life is in jeopardy. They are being resettled to make way for a major sugar plantation on their ancestral land – so ending their tradition of cattle herding.

Meanwhile, a massive new dam upstream will reduce the Omo River, ending its seasonal flood – and the food crops they grow on its banks. It is without doubt one of the most sensitive stories in Ethiopia and one the government is keen to suppress. Human rights groups have repeatedly criticised schemes like this, alleging that locals are being abused and coerced into compliance. I’d spoken to local senior officials in the provincial capital of Jinka, before travelling into the remote savannah. The suspicion is palpable as the chief of the south Omo zone lectures me. Local people and the area’s reputation have been greatly harmed by the negative reports by foreigners, he says. Eventually a frank exchange takes place and I secure verbal permission to report on the changes taking place in the valley.

How crazy would you like it?

• Does CNN Really Have A Video Ready For The Apocalypse? (BBC)

If the end of the world arrives, chances are you aren’t going to be watching CNN. But just in case you are, the cable news network has a video ready for the Big Sign-off. That’s according to blogger Michael Ballaban who posted the purported footage online. The clip isn’t much, really – just low-res footage of a US Army band playing a mournful rendition of Nearer My God to Thee, which takes a little over a minute. Then fade, presumably, to the rapture, apocalypse, giant comet impact or whatever coup de grace fate has in store for our little blue marble. Writing on the Jalopnik blog, Ballaban says he first heard about the video from a college professor who worked at CNN. He was then able to confirm its existence when he was an intern at the network in 2009. The video, he reports, is available on CNN’s MIRA archiving system under the name “TURNER DOOMSDAY VIDEO” – the lingering legacy, it seems, of now-departed CNN founder Ted Turner.

Of course, it’s existence shouldn’t be a total shock. Mr Turner has said that the same tune that serenaded the doomed passengers of the sinking Titanic would usher the world’s population into the great hereafter. Still, Ballaban writes, he was a bit sceptical. “It sounded mostly like a mythic joke, the kind of thing that Ted Turner, the all-around ‘eccentric billionaire’ archetype, would mention offhand. Bison ranches, the America’s Cup, four girlfriends at once, the last word on the last day on earth – why not?” he writes. Just in case there is any confusion, the video clip is marked, in bright red letters, with an HFR – “hold for release” – warning: “HFR till end of the world confirmed.” “CNN, once ever so thorough in its fact-checking, knew that the last employee alive couldn’t be trusted to make a call as consequential as one from the Book of Revelation,” Ballaban writes. “The end of the world must be confirmed.”

Debt Rattle October 3 2014

Oct 032014

October 3, 2014 Posted by Raúl Ilargi Meijer at 1:44 pm Finance Tagged with: Draghi, ebola, ECB, Fed, JPMorgan, Noyer, yen 6 Responses »

Dorothea Lange Negro women near Earle, Arkansas July 1936

Hi, Ilargi here. As per today, October 3, I’m going to make some changes I’ve been thinking about for a while, for a number of reasons. That is, the Daily Links that used to be in this space will now become part of a daily separate post, entitled Debt Rattle +date (to be found below where all posts are, at about 8am ET every day), which will also include the quotes from these same links, which used to be below our own daily essays. The latter will now stand on themselves, and also be separate posts. So the only change for you is that to get to the links, you will need to execute one extra click, but then you get everything I read everyday presented in one go.

If you think this is the worst idea ever, or if you think it’s great, please do let me know at ilargi •AT• theautomaticearth •DOT• com. And thanks for your support. Talking of which: please check our donate box, top of the left hand column, below the ad, and donate what you can. This site runs well below the poverty line these days, and it shouldn’t. I want to bring back a lot more Nicole Foss here, but she does have to make a living.

Yours, Raúl Ilargi Meijer

• Albert Edwards Says Watch Japanese Yen and Be Very Afraid (Bloomberg)	• “When Bad News Becomes Bad News Again”: Albert Edwards (Zero Hedge)
• Japanese Stocks Have Crashed Over 1000 Points Since Friday (Zero Hedge)	• Yen’s Steepest Decline in 20 Months Spreads Unease in Japan (Bloomberg)
• Emerging Stocks Pummeled as Weak Yen Boosts Japan (Bloomberg)	• Japan Inc. Begins To Turn Against The Weak Yen (MarketWatch)
• European Stocks Plunge Most In 16 Months As Draghi Disappoints (Zero Hedge)	• Eurozone Private-Sector Growth Slows More Sharply (MarketWatch)
• Draghi Keeps QE Herd Waiting With Stimulus Goal Shrouded (Bloomberg)	• Mario Draghi Stung By Austerity Critics As Naples Hit By Protests (Guardian)
• Mario Draghi’s QE: Too Little For Markets, Too Much For Germany (AEP)	• France’s Noyer Is Third ECB Dissenter Against ABS Buying Plan (Bloomberg)
• Bank of England To Hike Rates Before Fed But At Slower Pace: Goldman (CNBC)	• China Debt Fix Is ‘Short-Term Pain, Long-Term Gain’ (CNBC)
• Oil Heads To Bear Market As Saudis Signal Price War (CNBC)	• JP Morgan: 76 Million Households Hit In Largest Ever Data Breach (Guardian)
• Is the New York Fed a Pushover for Big Banks? Dudley Fires Back (Bloomberg)	• How to Collect Argentina Bond Payment Is An Unsolved Riddle (Bloomberg)
• Humans Lose to Machines in $500 Billion-a-Day Bond Market (Bloomberg)	• Four People Close To US Ebola Patient Quarantined In Dallas (Reuters)
• NBC Cameraman Becomes 4th American To Test Positive For Ebola (Telegraph)	• Ebola ‘Could Become Airborne’: UN Warns Of ‘Nightmare Scenario’ (Telegraph)

“What happened in March 2009, when the S&P 500 touched 666, that was just a brief stop,” he said. “We will go lower than that.”

• Albert Edwards Says Watch Japanese Yen and Be Very Afraid (Bloomberg)

The Japanese yen goes into freefall. China’s fragile economy tips over the edge. A wave of profit-crushing deflation comes washing over the U.S. and Europe. Investors panic. That’s the view of perennial pessimist Albert Edwards. The London-based analyst and his team at investment bank Societe Generale SA have been ranked No. 1 for global strategy in surveys by Thomson Reuters Extel every year since 2007, even with a history of saying unpleasant things that few want to hear. “My role is to step back from the excessive enthusiasm that builds up in the market, and to just say, ‘This is wrong. This is going to go horribly wrong,’” the 53-year-old said by phone last week. The cliche is that when the U.S. sneezes, Japan catches a cold. Edwards says Japan is just as apt to lead the way.

When the Internet bubble burst in 2000, Japan’s tech-heavy Jasdaq index started to slide weeks before the Nasdaq. Japan also pioneered the deflation that now threatens the West. In 1997, it was a plunging yen that helped trigger Asia’s currency crisis. With the yen’s drop this week to a six-year low of 110 versus the dollar, Japan’s currency may once again be the first domino to fall in a chain of events that could be bad for everyone, according to Edwards. The U.S. stock market rally has been going for 66 months since the financial crisis bottomed in March 2009, a streak that’s already a year longer than average. A disconnect between buoyant equity prices and corporate profit growth in the low single-digits makes the situation especially precarious. “Almost 100% of investors think we’re at the start of a long recovery,” Edwards said.

“It’s already a long recovery. Forget about starting from here.” In an hour-long interview, during which he made the global economy sound like a game of Mousetrap, Edwards explained why investors should be watching Japan for clues about what may happen in the next big trouble-spot: China, whose economy is already headed for its slowest full-year growth since 1990. The argument was this: if the yen falls, it will take other Asian currencies down with it. Eventually China will be forced to weaken the yuan, by adjusting its trading range and expanding its money supply, to keep its exports competitive. That will squeeze developed economies that have yet to fully recover from the financial crisis.

[..] In 2006, when the S&P 500 was rising ever higher and then-Fed Chairman Alan Greenspan was being feted as “the Maestro,” Edwards called him “an economic war criminal.” Two years later financial markets were in crisis. Edwards’ aversion to equities stems from watching the experience of Japan, where the market took more than two decades to find a bottom after the 1989 bust. According to Edwards’ view, it’s a template for the extended bear market that will unfold in the U.S. and Europe, as stocks recover only to crash again and plumb ever-new lows. “What happened in March 2009, when the S&P 500 touched 666, that was just a brief stop,” he said. “We will go lower than that.” The structural bear market ends when equities are dirt cheap.”

“Investors are beginning to see how impotent the Fed and ECB’s efforts are to prevent deflation”.

But:

” … investors once again chose to tilt their ears towards the reassuring siren songs of the Central Bankers and away from the increasingly hysterical ramblings of the perma-bears and doomsayers.”

• “When Bad News Becomes Bad News Again”: Albert Edwards (Zero Hedge)

One of Albert Edwards’ trademark terms to define the New (and not so New) Normal, is the so-called Ice Age: a period of prolonged stagnation marked by pervasive deflation, deteriorating living conditions and a sliding stock market. It was to defeat the oncoming “Ice Age” that the global central banks embarked on a massive, coordinated (and largely failed) money printing monetary experiment some 6 years ago. Now, in what Albert Edwards dubs his “second most important chart for investors”, (as a reminder his “most important chart” is here), he warns that as a result of the central banks to offset broad deflationary headwinds, the Ice Age is once again just around the corner. From his most recent note, here is what Albert Edwards believes is the chilly chart that is the “second most important for investors.”

Inflation expectations in the US have just followed the eurozone by plunging lower. Until very recently, the Fed and the ECB had been quite successful at keeping inflation expectations in their normal range – this despite their clear failure to control actual inflation itself, which has consistently undershot expectations. Investors are beginning to realise that contrary to their confident actions and assurances, the Fed and the ECB have failed to prevent a dreaded replay of Japan’s deflationary template a decade earlier in the West. The Ice Age is once again about to exert its frosty embrace on markets as investors wake up to a new and colder reality. There were two key parts to our Ice Age thesis. First, that the West would drift ever closer to outright deflation, following Japan’s template a decade earlier. And second, financial markets would adjust in the same way as in Japan. Government bonds would re-rate in absolute and relative terms compared to equities, which would also de-rate in absolute terms.

This would take many economic cycles to play out. Previous US equity valuation bear markets have taken 4-6 recessions to complete; we’ve only had two thus far. Another associated element of the Ice Age we also saw in Japan is that with each cyclical upturn, equity investors have assumed with child-like innocence, that central banks have somehow ‘fixed’ the problem and we were back in a self-sustaining recovery. Those hopes would only be crushed as the next cyclical downturn took inflation, bond yields and equity valuations to new destructive lows. In the Ice Age, hope is the biggest enemy. Investors must pay close attention to the (second most important) chart below. Investors are beginning to see how impotent the Fed and ECB’s efforts are to prevent deflation. And as the scales lift from their eyes, equity, credit and other risk assets trading at extraordinary high valuations will take their next giant Ice Age stride towards the final denouement.

They may be impotent to prevent deflation, but they are quite omnipotent at printing money, either electronically or in paper format, and while so far they have focused on outside money, soon they will shift to “inside” money creation, also known as Bernanke’s helicopter paradrop. That will be the moment when the status quo finally uses the nuclear option at pervasive global deflation, leading to a collapse in sequential, or parallel, collapse in fiat. But even before that, there is something, that to the current generation of traders may be even scarier: a return to normalcy, or as Edwards calls it: bad news being bad news again, something which traders haven’t experienced in nearly 6 years.

… “amid the inevitable impending global economic and financial carnage, when people, like Queen Elizabeth ask, as she did in November 2008, why no-one saw this coming, tell them that many did. But just like in 2006, before the Great Recession, investors once again chose to tilt their ears towards the reassuring siren songs of the Central Bankers and away from the increasingly hysterical ramblings of the perma-bears and doomsayers.”

Let’s talk Japan, shall we? This is what you call deep trouble.

• Japanese Stocks Have Crashed Over 1000 Points Since Friday (Zero Hedge)

After ticking just above 110.00, USDJPY has been a one-way street lower and that means only one thing… Japanese stocks are cratering. From Friday’s highs, The Nikkei 225 has crashed over 1000 points (despite Abe’s promises yet again of more pension reform buying of stocks). Of note, perhaps, is that, Japanese investors bought a net $3.6 billion of foreign stocks last week – the most since January 2009 – perfectly top-ticking global equities… Well played Mrs. Watanabe.

What seemed so nice and benign, the weaker yen, threatens to turn into a nightmare.

• Yen’s Steepest Decline in 20 Months Spreads Unease in Japan (Bloomberg)

The yen’s steepest decline in 20 months is prompting concern in Japan that the central bank’s support for a weaker currency may hurt consumers and companies. Monetary authorities intervention to curb the slump is “possible,” according to Hirohisa Fujii, a former finance minister and member of the opposition party, after the currency’s steepest drop last month since January 2013. Some companies are suffering from the weaker yen, Nobuhide Minorikawa, Japan’s vice finance minister said this week, following comments from the nation’s economy minister on the risk of excessive gains or declines in the yen. The chorus of dissent against the Bank of Japan’s accommodative monetary policy, which has seen 60 trillion yen ($553 billion) to 70 trillion yen committed to annual asset purchases, is growing louder, as consumer prices remain depressed and growth is anemic. The weaker yen puts Japan at risk of recession, Kazumasa Iwata, deputy governor of the central bank until 2008, warned last month.

“The whole notion of devaluing the currency has been a bad policy,” Robert Sinche, a global strategist at Pierpont Securities, said by phone. “They think the yen is overvalued, but we’ve just had a very extreme move and I think their concern was that it could destabilize markets and destablize the economy.” Sinche forecasts the currency will slump to 120 yen per dollar by the end of 2015. The currency slumped 5.3% last month and is down 2.8% this year. The weaker yen is driving up the price of imported energy and hurting small companies, consumers, and Japan’s regional economies, Vice Finance Minister Minorikawa said in Tokyo yesterday. A weaker currency is positive for companies that have overseas business or rely on exports, he said. BOJ Governor Haruhiko Kuroda said last month, after the dollar rose above 109 yen, that he didn’t see any big problems with current movements in exchange rates.

Everybody will get hit by the higher dollar. Everybosy except Wall Street banks, that is.

• Emerging Stocks Pummeled as Weak Yen Boosts Japan (Bloomberg)

The yen’s slide to a six-year low is amplifying a rout in emerging-market stocks as investors shift their focus to Japanese companies with earnings in dollars, according to Morgan Stanley. The CHART OF THE DAY shows the MSCI Emerging Market Index tumbled 7.6% in September, the most since May 2012, led by China and Hong Kong. That compares with a 3.8% drop for the Topix Index in the period. The yen depreciated 5.1% versus the dollar to the weakest level since August 2008 last month, while a gauge tracking developing-nation currencies retreated 3.8%. “Asset allocation away from emerging markets was in part because Japan was back and that yen weakness is a positive catalyst,” Jonathan Garner, Hong Kong-based head of Asia and emerging-market strategy at Morgan Stanley, said by phone on Sept. 25.

“We don’t have a large export-industrial dollar earnings sector for EM, while Japan’s corporate-sector earnings responded positively to yen weakness.” Japan’s exporters are benefiting from a weaker currency, which boosts overseas income when repatriated, while developing-nation assets have come under pressure as the prospect for higher Federal Reserve interest rates dents demand for riskier assets. Toyota, the world’s biggest carmaker by market value which derives most of its revenue from the U.S., rallied 9% last month. Net inflows to U.S. exchange-traded funds that invest in emerging-markets tumbled 82% to $977.9 million in September, led by a 90% decline to China and Hong Kong, data compiled by Bloomberg show.

All the promised exports ain’t going anywhere either. As we predicted.

• Japan Inc. Begins To Turn Against The Weak Yen (MarketWatch)

When the Japanese yen began its long descent in late 2012 — around the time it became clear Shinzo Abe would be elected to another prime-ministership — the executives running Japan’s top corporations seemed to believe that the lower the currency, the better, regardless of all else. But since then, the yen has trekked steadily, inexorably downward against the dollar, with the greenback rising from around ¥78 two years ago to ¥110 earlier this week. And, at least according to a Nikkei news survey out Friday, some senior corporate officers are having second thoughts about the race to the bottom for forex. The survey covered responses from 65 chief financial officers at the largest Japanese corporations, an admittedly small sample. But it’s notable that more than half said they’d prefer the dollar to range between ¥100 and ¥104, a level last seen in early September.

The next most popular forex range was for a dollar just above ¥108 — but only just: A mere 3% called for a rate between ¥110 and ¥114 rate. And not a single CFO said they wanted to see the dollar breach above ¥115. Of course not all companies see the yen in the same way. While some follow the classic exporter model of making stuff at home to sell abroad, many corporations do not. Consider Honda: The cars it sells in North America, for instance, are generally made in North America, with the costs incurred in foreign currencies. Of course, it does eventually repatriate the profit, but its geographic diversity means there’s no special rush to do so. And of course, for companies that need to import materials — especially fuel — the falling yen is no good at all. Meanwhile, the Nikkei survey said roughly 20% of CFOs surveyed are looking at further forex hedging on the futures market to guard against any further dramatic currency moves.

The ECB spells infighting these days.

• European Stocks Plunge Most In 16 Months As Draghi Disappoints (Zero Hedge)

Broad European stocks plunged into the red for 2014 today as a rattled Mario Draghi disappointed a hungry-for-more risk market. Bloomberg’s BE500 index dropped its most since June 2013 to 2-month lows led by weakness in Italian banks. UK stocks underperformed (-3.6%) but Spain, Italy, and Portugal all tumbled 2-3%. The selling pressure interestingly stayed in stocks as bond spreads rose only modestly and EURUSD roundtripped to only a small rise from pre-ECB. Notably, US equities are cratering as they are so used to the pre-EU-close pump that did not happen.

And the eurozone is sick.

• Eurozone Private-Sector Growth Slows More Sharply (MarketWatch)

Activity in the eurozone’s private sector slowed more sharply in September than initially estimated, an indication that the currency area’s economy remains trapped in a period of low or no growth. Data firm Markit’s monthly composite purchasing managers index–a measure of activity in the currency bloc’s manufacturing and services sectors–fell to 52.0 from 52.5 in August, and was lowered from an initial estimate of 52.3. The average PMI for the third quarter was lower than in either of the two previous periods. But there are some parts of the economy that may be benefiting from low inflation for now. Figures released by the European Union’s statistics agency on Friday showed the volume of retail sales rose by 1.2% in August from July, the largest increase since Dec. 2009 and likely reflecting a pickup in real wages.

European Central Bank President Mario Draghi Thursday acknowledged that recent surveys have pointed to a “weakening in the euro area’s growth momentum,” but said the ECB governing council continues to expect a recovery in 2015. However, he warned those expectations could be disappointed, noting in particular that the economy’s second-quarter stagnation, and signs the third quarter wasn’t much better, “could dampen confidence and, in particular, private investment.” The governing council took no new action at its meeting Thursday, despite inflation weakening to a five-year low, signaling that it will wait to see if stimulus measures undertaken in recent months lift the eurozone’s weak economy. The surveys of 5,000 businesses across the currency area indicated that the annual rate of inflation is unlikely to quickly move back toward the central bank’s target of just below 2%, and may fall further below it. Manufacturers and service providers said they cut their prices again in September, and more steeply than in any month since July 2013.

Too much dissent. Draghi is stuck.

• Draghi Keeps QE Herd Waiting With Stimulus Goal Shrouded (Bloomberg)

Mario Draghi hasn’t moved any closer to full-blown quantitative easing. Focusing on plans to buy private debt as soon as this month to buoy the weakest euro-area inflation in five years, the European Central Bank president yesterday left the option of purchasing government bonds in his toolbox. He also backpedaled on indications that he could boost the central bank’s balance sheet by as much as €1 trillion ($1.3 trillion). Draghi’s reluctance to spell out how many assets officials might buy disappointed investors pushing him to go all-in. With the outlook for consumer prices worsening and the 18-nation economy closer to renewed recession, they’re pressuring him to honor his pledge to take further action if needed. “For a dove, that was hawkish,” said Lars Peter Lilleore, chief analyst at Nordea Markets in Copenhagen. “The herd of market participants pining for QE will have to wait a bit longer.”

The ECB will start buying covered bonds this month and asset-based securities this quarter and continue for at least two years, Draghi said yesterday after the 24-member Governing Council met in Naples, Italy. He also reiterated that he wants to “steer” the ECB’s assets toward early-2012 levels, when they were at more than €3 trillion, compared with €2 trillion currently. Yet he also said investors shouldn’t place too much emphasis on the precise size of the balance sheet. “Draghi seemed to back away from his previous commitment to expand the ECB’s balance sheet back to 2012 levels,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “What the markets were hoping for were some ballpark figures for what the ECB was likely to achieve.”

Spanish and Italian bonds dropped and the euro rose as the lack of a target conflicted with Draghi’s claim that policy makers are taking greater control over the level of stimulus they inject. “The door to quantitative easing didn’t widen or narrow,” said Hetal Mehta, a London-based economist at Legal & General Investment Management, which oversees 450 billion pounds ($726 billion). “The ECB is very much in a wait-and-see mode.” The refusal to lock in a number may reflect division among policy makers or a suspicion that a lack of available assets limits any swelling of stimulus, said Azad Zangana, European economist at Schroder Investment Management Ltd. in London.

Stuck on both sides, that is.

• Mario Draghi Stung By Austerity Critics As Naples Hit By Protests (Guardian)

Mario Draghi gave an impassioned defence of the European Central Bank’s role in the eurozone crisis as anti-austerity protestors took to the streets of Naples blaming the central bank for economic misery. The ECB’s president rejected the suggestion that the bank had been an agent of doom for the people of Italy and the wider economic bloc because of its role in pushing spending cuts and tax rises in some of the worst hit countries in the region. Speaking after the October meeting of the ECB’s governing council in Naples, he insisted the it had instead taken radical steps in recent months to breathe some life into the eurozone’s flagging economy. “I think the description of the ECB here as the guilty actor needs to be corrected. Go back and ask yourself how you were two and a half, three years ago. The financial system seemed on the verge of collapsing.” Draghi appeared to be stung as the bank became the subject of protests in his home country. Protestors held banners declaring “block the ECB” and “job insecurity, poverty, unemployment, speculation. Free us from the ECB.”

Reeling out a list of measures introduced by the ECB over recent months to combat weak growth and low inflation, Draghi said they were expected to have a “sizeable impact” on the eurozone economy. He added: “We have done a lot since June, quite unprecedented. We have decided a massive amount of measures now and we haven’t yet seen the impact on the economy.” Last month the ECB took markets by surprise, further cutting the main interest rate from 0.15% to 0.05%. Policymakers also made it more expensive for banks to park money with the ECB – cutting the deposit rate, which was already negative, from -0.1% to -0.2% in the hope of persuading banks to lend more to businesses and consumers. The ECB announced no new measures on Thursday, and failed to reveal the scale of an asset purchasing scheme announced last month. Investors were left disappointed, contributing to a large scale selloff of equities across Europe.

“Mr Draghi is facing a severe credibility problem” alright, but that’s not the whole story. He has a rock and a hard place problem.

• Mario Draghi’s QE: Too Little For Markets, Too Much For Germany (AEP)

European stocks have suffered the steepest one-day fall in 15 months after the European Central Bank retreated from pledges for a €1 trillion blitz of stimulus and failed to clarify the scale of quantitative easing. The sell-off came amid a mounting political storm in Europe as leading German economists and jurists reacted with fury to the ECB’s first asset purchases, denouncing the move as monetary debauchery, and threatening a blizzard of lawsuits in the German courts. “Our worst fears are being fulfilled,” said Hans Werner Sinn, head of Germany’s IFO Institute. The Milan bourse tumbled almost 4pc, led by sharp falls in Italian banks counting on fresh ECB liquidity. The Eurostoxx 600 index was off 2.4pc and the FTSE 100 fell 1.7pc to its lowest level this year, with effects spreading through global markets. The CRB index of commodities slumped to 2004 levels, before the onset of the resource boom, and Brent crude fell to a two-year low of $92.83 on rising Libyan supply and fears of a deepening industrial slowdown in China.

Mario Draghi, the ECB’s president, seemed unable to secure backing for far-reaching measures from Germany’s two ECB members or from the German finance ministry, forcing him to play down earlier hints for a €1 trillion boost to the ECB’s balance sheet. As he spoke inside a renaissance palace in Naples, riot police doused crowds of protesters on the street outside with water cannon. The city has become a political cauldron, with the highest “misery index” Europe. Youth unemployment in Italy’s Mezzogiorno is still rising, topping 56pc in the second quarter. Mr Draghi said the ECB would start to buy covered bonds and asset-backed securities (ABS) as soon as this month, but gave no concrete figure and deflected all questions on the scope of stimulus. “I wouldn’t want to emphasise the balance sheet size per se,” he said. Sovereign bond strategist Nicholas Spiro said the ECB was “backtracking” on earlier pledges and seemed to be losing confidence in its ability to halt deflation at all. “Mr Draghi is facing a severe credibility problem,” he said.

The central bankers of Germany, France and Austria are all against the ABS plan. That’s what you get when you want to buy junk loans.

• France’s Noyer Is Third ECB Dissenter Against ABS Buying Plan (Bloomberg)

France’s Christian Noyer joined European Central Bank policy makers from Germany and Austria in opposing a program to buy asset-backed securities, according to two euro-area officials. His dissent leaves President Mario Draghi facing a clash with policy makers from the region’s two largest economies, albeit for different reasons. While Noyer disapproved of the way the purchases will be conducted, Austrian central bank Governor Ewald Nowotny shared Bundesbank President Jens Weidmann’s view that the measure involves too much balance-sheet risk, said the people, who asked not to be identified because the talks are private.

Draghi unveiled details of the program yesterday, pledging to buy both covered bonds and ABS before the end of the year. He shied away from a definitive goal for the plan, saying total stimulus may fall short of the 1 trillion euros ($1.3 trillion) he had signaled in September. Noyer opposed the design of the program because it will exclude national central banks from its implementation, said the people. ECB policy is generally conducted in a decentralized way, with national institutions responsible for refinancing their banks and purchasing securities. In this case, the ECB has opted to involve outside brokers to buy ABS, the people said, even though the French central bank has a long-standing expertise in assessing the quality of ABS. It was the euro-area hub for valuing the assets until 2012, when it was replaced by a regional initiative.

How smart is this when the dollar is rising?

• Bank of England To Hike Rates Before Fed But At Slower Pace: Goldman (CNBC)

The Bank of England (BoE) will start to tighten the screws of monetary policy earlier than the Federal Reserve but will raise rates at a slower pace than its U.S. counterpart, according to Goldman Sachs. The BoE will begin raising interest rates in the first quarter of 2015, while the Fed will wait until the third quarter, Goldman Sachs economists led by Huw Pill wrote in a note on Friday. The U.K. central bank appears more hawkish than its U.S. counterpart, they said. “We expect U.K. rates to rise by around 75 basis points per year vs. 100-125 basis points per year in the U.S. [between 2015-2018],” Pill said. The difference in the speed of interest rate hikes comes down to the different cyclical positions of each economy. “Looking forward, we expect U.K. GDP (gross domestic product) growth and the pace of the decline in U.K. unemployment to moderate in the quarters ahead, both in absolute terms and relative to the U.S. All else equal, this would imply the need for a slower pace of tightening in the U.K.,” Pill said.

Britain’s economy grew 0.9% in the three months from April to June this year, the quickest increase since the third quarter of 2013. The U.S. economy, meanwhile, expanded at a 4.6% annual rate over the same period, its fastest pace in 2-1/2 years. Looking back over the past quarter-century, the BoE has typically tightened more slowly than the Fed, according to Goldman. On the basis of five tightening cycles for the U.K. and three for the U.S. over this period, the Fed has raised rates on average by 2.1 percentage points in the first year, while the BoE has raised rates by just 1.3 percentage points. One reason they have risen more gradually is that the U.K.’s private sector has been more highly leveraged compared with the U.S. In addition, the average duration of debt held by British households is shorter than their American counterparts.

China debt fix is desperate.

• China Debt Fix Is ‘Short-Term Pain, Long-Term Gain’ (CNBC)

China’s debt loads have long loomed as a serious economic risk, and while analysts say new plans to clean up local government borrowing will bring near-term pain, a longer-term fix may be in sight. “[The new plan] represents the first concrete step by the central government to clean up the debt problems at the local governments,” analysts at Bernstein Research said in a note Friday. Provincial governments’ debt, often issued via local government financing vehicles, or LGFVs, has worried economists for years. Outstanding debt climbed to around 17.9 trillion yuan ($2.92 trillion) by the end of the first half of 2013, according to the most recent national audit, from around 10.7 trillion in 2010. On Thursday, China’s State Council, its highest authority, set quotas on the amount of debt that local governments can issue, required it to be used for public projects rather than operational spending and tied debt levels to local officials’ performance reviews.

It also barred local governments from using LGFVs and state-owned enterprises (SOEs) to raise debt and from guaranteeing or covering the liabilities of financial institutions or local corporates. “It’s a tick in the right box,” said Freya Beamish, an economist at Lombard Street Research, noting it indicates Beijing is willing to accept slower growth as a step toward avoiding an “Armageddon” scenario over its debt. “While this may bring short-term pain in terms of slowing economic growth and accelerating credit losses at LGFVs, we think the reform will benefit the economy and the Chinese banking sector in the long term,” Bernstein said. It expects the reforms will weaken economic growth in debt-laden provinces as they incorporate existing and new debt into their budgets, as well as spurring an increase in the number of defaults among existing LGFV and local SOE debts.

Saudis are dumping. Couldn’t have anything to do with putting the squeeze on Putin?!

• Oil Heads To Bear Market As Saudis Signal Price War (CNBC)

Oil could continue its deep slide, possibly dipping into bear market territory, under new pressure from Saudi Arabia’s decision to defend market share, as opposed to cutting production to battle falling prices. A well-supplied oil market, helped by increased North American production and softer global demand as Europe’s economy falters and Chinese demand growth slows, has created a supply imbalance that has driven prices sharply lower. The Saudi move is counter to expectations that it would further cut its 9.6 million barrel-a-day production to bring back oil prices. West Texas Intermediate oil futures for November hit a 17-month low early Thursday, falling below the $90 mark for the first time since April 2013. That was a 16% decline from its June high. Brent, the international benchmark, fell to a 27-month low of $91.55 per barrel, before recovering at about $93 per barrel for November futures. Brent, at the low, was about 19% off its high. A weaker dollar helped lift oil off its lows.

Oil analysts expect oil to fall another couple%, which could take both WTI and Brent into bear market territory—a 20% decline from recent highs. “It’s both supply and demand. it’s basically the perfect storm that brought oil prices down,” said Fadel Gheit, Oppenheimer senior energy analyst. “You have plenty of supply which you never thought possible, and all of a sudden, demand is shrinking, China’s slowing down, Europe never recovered.” He said the fact that the Saudis are willing to play hardball with prices makes it difficult for other oil-based economies like Russia. Saudi Aramco, the state-run oil company, surprised markets Wednesday when it announced it would cut official prices for Asian customers in November. The cuts come as the Organization of Petroleum Exporting Countries was expected to be on course to cut back on production instead, to protect prices.

That’s a lot of people.

• JP Morgan: 76 Million Households Hit In Largest Ever Data Breach (Guardian)

JP Morgan Chase, one of the largest banks in the US, said on Thursday that a massive computer hack affected the accounts of 76 million households and about seven million small businesses, making it one of the largest of its kind ever discovered. The attack was under way for a month before it was discovered in July, and when it was disclosed in August, the bank estimated that about one million accounts had been compromised. But the latest information revealed on Thursday showed the attack was vastly more serious than earlier thought. The bank said financial information was not compromised and that there had been no breach of login information such as account or social security numbers, passwords or dates of birth. However names, email addresses, phone numbers and addresses of account holders were captured by hackers. “As of such date, the firm continues not to have seen any unusual customer fraud related to this incident,” the bank said in a regulatory filing. It said customers would not be liable for unauthorized transactions on their account.

JP Morgan, the largest bank in the country by assets, is working with the Federal Bureau of Investigation and the US secret service to determine the roots of the attack. The scale of the hack, one of the largest ever, comes after a series of massive data breaches at US institutions and follows in the wake of attacks on Target and Home Depot. In September, Home Depot confirmed its payment systems were breached in an attack that some estimated impacted 56 million payment cards. Last year’s attack on Target impacted 40 million payment cards and compromised the personal details of some 70 million people. But the JP Morgan hack is considerably more serious, as banks holds far more sensitive information than retailers. In August, Bloomberg reported that the attack on JP Morgan had been linked to Russian hackers who FBI sources said had been able to extract “gigabytes of sensitive data”.

Integrity!

• Is the New York Fed a Pushover for Big Banks? Dudley Fires Back (Bloomberg)

William C. Dudley, president of the Federal Reserve Bank of New York, defended his bank-supervision staff following allegations that they had been too deferential to large financial firms. “I completely stand behind the integrity and work of our supervision staff,” he said after a speech today in New York. “They are operating completely in the public interest.” Dudley’s remarks, his first addressing allegations of lax supervision aired last week by former employee Carmen Segarra, highlight the New York Fed’s difficulties in overcoming perceptions that it’s too close to Wall Street. “This is a zero-credibility era for big banks and their regulators,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington. As a result, stories like Segarra’s “have a lot of resonance regardless of their truth,” she added. Dudley turned voluntarily to the topic after getting no questions about it from the audience at New York University’s Stern School of Business.

He said there had been a “significant reorganization” following a report commissioned by the regional Fed bank, and that “improving supervision has been and remains an ongoing priority for me.” The 2009 report, by Columbia University Professor David Beim, made recommendations to improve bank supervision, including that Fed officials should seek to keep their distance and be more skeptical of the banks they oversee. Dudley’s comments follow reports last week on the radio program “This American Life” and ProPublica, a nonprofit news organization. The radio program broadcast excerpts of conversations it said were secretly recorded by Segarra, a former New York Fed bank examiner fired in 2012, with some of her colleagues and her supervisor. In a transcript of the broadcast, Segarra described how she felt that her Fed colleagues were afraid of Goldman Sachs and handled it with kid gloves.

Disgraceful.

• How to Collect Argentina Bond Payment Is An Unsolved Riddle (Bloomberg)

After announcing a plan to sidestep a U.S. court order that prevented Argentina from paying its bondholders, Economy Minister Axel Kicillof scoffed at the idea that it would be hard to pull off. “No one’s going to have to take a plane,” he told reporters Aug. 20. “These days even your gas and electricity bills can be paid by the Internet. We’re not going to have an influx of bond tourists coming to get paid.” Six weeks later, holders of the nation’s foreign-currency bonds still have no idea how the plan will actually enable them to get paid. While Argentina has deposited $161 million with a local bank in downtown Buenos Aires to make good on an interest payment due Sept. 30, the government hasn’t given bondholders any instructions on how they can go about collecting their cash, said Emso Partners, which owns Argentine notes.

“It’s a completely symbolic gesture designed to allow Argentina to continue to claim that it’s fulfilling its obligations to bondholders,” Patrick Esteruelas, an analyst at Emso, a New York-based hedge fund, said by telephone. “Without being able to secure the information and effectively confirm who it is that is the holder of the bond, you don’t have a verifiable mechanism to impart payment or collect payment.” Argentina’s attempt to honor its debt underscores how bondholders remain in limbo two months after the court order blocked a debt payment and caused the nation to default on July 30, its second in 13 years. The government, which has been entangled in a legal dispute with unpaid creditors from its $95 billion default in 2001, was barred from paying other bondholders until it settled with the so-called holdouts.

And everywhere else too.

• Humans Lose to Machines in $500 Billion-a-Day Bond Market (Bloomberg)

While investors traditionally negotiated prices for U.S. Treasuries by telephone, they’re increasingly turning to computer-based marketplaces for a range of price quotes from different dealers. Human traders are increasingly losing out to machines in the world’s biggest bond market. While investors traditionally negotiated prices for U.S. Treasuries by telephone, they’re increasingly turning to computer-based marketplaces for a range of price quotes from different dealers. A record 48% of trades in U.S. government debt have occurred on electronic platforms this year, up from 31% in 2012, according to a Greenwich Associates study released yesterday. Bond managers are looking for more efficient ways to determine values in a $12 trillion market as banks use less of their own money to opportunistically buy and sell, giving them less of an edge when they pitch their brokerage services. “Investment firms are much more focused on being able to prove they’re getting good execution than ever before,” said Kevin McPartland, head of research at Greenwich Associates.

“In Treasuries, the market seems ripe for electronic trading.” The trend is squeezing profits on Wall Street, where firms are already facing lower trading revenues in a sixth year of record Federal Reserve stimulus that’s suppressing yields and volatility. (Bloomberg LP, the parent company of Bloomberg News, and Tradeweb Markets LLC are the dominant providers of electronic systems for Treasuries trading, according to the Greenwich Associates study.) The biggest banks reduced their rates-trading balance sheets by almost one-third, or about $200 billion, since the 2010 peak, Credit Suisse Group AG analysts Ira Jersey and William Marshall wrote in a May report. While electronic trading systems may allow for faster price discovery, the trend may also discourage some investors from selling bigger chunks of less-traded securities out of concern they may move prices against themselves.

Too many hiccups in this case.

• Four People Close To US Ebola Patient Quarantined In Dallas (Reuters)

Four people close to the first person diagnosed with Ebola in the United States were quarantined in a Dallas apartment, where sheets and other items used by the man were sealed in plastic bags, as health officials widened their search for others who had direct or indirect contact with him. In Liberia, an American freelance television cameraman working for NBC News in Liberia has contracted Ebola, the fifth U.S. citizen known to be infected with the deadly virus that has killed at least 3,300 people in the current outbreak in West Africa. The 33-year-old man, whose name was not released, will be flown back to the United States for treatment, the network said on Thursday. Immediately after beginning to feel ill and discovering he was running a slight fever, the cameraman quarantined himself. He then went to a Doctors Without Borders treatment center and 12 hours later learned he tested positive for Ebola.

The entire NBC crew will fly back to the United States on a private charter plane and will place themselves under quarantine for 21 days, the maximum incubation period for Ebola. U.S. health officials said they were confident they could prevent the spread of Ebola in the United States after the first case was diagnosed this week on U.S. soil. Up to 100 people had direct or indirect contact with Thomas Eric Duncan, a Liberian citizen, and a handful were being monitored, said Dr. Thomas Frieden, director of the U.S. Centers for Disease Control and Prevention (CDC). None of those thought to have had contact with Duncan were showing symptoms of Ebola, Dallas County officials said at a news conference.

And counting.

• NBC Cameraman Becomes 4th American To Test Positive For Ebola (Telegraph)

An American freelance television cameraman has contracted Ebola in Liberia, becoming the fourth US national to be diagnosed with the deadly disease. He had been hired on Tuesday to work with NBC News chief medical editor Dr Nancy Snyderman covering the outbreak which has so far killed more than 3,000 people in West Africa. A statement on the news network’s website said; “The freelancer came down with symptoms on Wednesday, feeling tired and achy. As part of a routine temperature check he discovered he was running a slight fever. He immediately quarantined himself and sought medical advice.” He went to a Medecins Sans Frontieres treatment centre on Thursday and a positive result for Ebola came back 12 hours later. Mr Mukpo, who has been working in Liberia for three years, is the fourth American to contract Ebola in Liberia during the current outbreak. The others were Christian missionaries.

A slim chance for now, but …

• Ebola ‘Could Become Airborne’: UN Warns Of ‘Nightmare Scenario’ (Telegraph)

There is a ‘nightmare’ chance that the Ebola virus could become airborne if the epidemic is not brought under control fast enough, the chief of the UN’s Ebola mission has warned. Anthony Banbury, the Secretary General’s Special Representative, said that aid workers are racing against time to bring the epidemic under control, in case the Ebola virus mutates and becomes even harder to deal with. “The longer it moves around in human hosts in the virulent melting pot that is West Africa, the more chances increase that it could mutate,” he told the Telegraph. “It is a nightmare scenario [that it could become airborne], and unlikely, but it can’t be ruled out.” He admitted that the international community had been “a bit late” to respond to the epidemic, but that it was “not too late” and that aid workers needed to “hit [Ebola] hard” to rein in the deadly disease.

Mr Banbury was speaking shortly before the first Ebola diagnosis was made in the US on Tuesday evening. The man, who contracted Ebola in Liberia before flying to Dallas, Texas, is the first case to be diagnosed outside Africa, where the disease has already killed more than 3,000 people. The number of people infected with Ebola is doubling every 20 to 30 days, and the US Center for Disease Control and Prevention has forecast that there could be as many as 1.4m cases of Ebola by January, in the worst case scenario. More than 3,300 people have been killed by the disease this year. Mr Banbury, who has served in the UN since 1988, said that the epidemic was the worst disaster he had ever witnessed.