The Fed’s efforts to raise interest rates across the spectrum have borne fruit only in limited fashion. In the Treasury market, yields of longer-dated securities have not risen (prices fall when yields rise) as sharply as they have with Treasuries of shorter maturities. The two-year yield has surged to 2.41% on Tuesday, the highest since July 2008. But the 10-year yield, at 2.82%, while double from two years ago, is only back where it had been in 2014. So the difference (the “spread”) between the two has narrowed to just 0.41 percentage points, the narrowest since before the Financial Crisis:
This disconnect is typical during the earlier stages of the rate-hike cycle because the Fed, through its market operations, targets the federal funds rate. Short-term Treasury yields follow with some will of their own. But the long end doesn’t rise at the same pace, or doesn’t rise at all because there is a lot of demand for these securities at those yields. Investors are “fighting the Fed”— doing the opposite of what the Fed wants them to do – and the difference between the shorter and longer maturities dwindles, and it dwindles, and it causes a lot of gray hairs, and it dwindles further, until it stops making sense to investors and they open their eyes and get out of the chase, and suddenly long-term yield surge higher, as bond prices drop sharply.
That’s why short sellers have taken record positions against the 10-year Treasury recently: they’re waiting for yields to spike to the next level. But this disconnect – this symptom of investors fighting the Fed – in the Treasury market is mild compared to the disconnect in the junk bond market. There, investors have completely blown off the Fed. At least in the Treasury market, 10-year yields have risen since the Fed started getting serious about rate increases in December 2016. In the junk bond market, yields have since fallen. In other words, despite the Fed’s tightening, the junk bond bubble has gotten bigger. And investors are not yet showing any signs of second thoughts.
The postwar global trading system risks being torn apart, the International Monetary Fund has warned, amid concern over the tariff showdown between the US and China. In a sign of its growing concern that protectionism is being stimulated by voter scepticism, the IMF used its half-yearly health check for the world economy to tell policymakers they needed to address the public’s concerns before a better-than-expected period of growth came to an end. Maurice Obstfeld, the IMF’s economic counsellor, said: “The first shots in a potential trade war have now been fired.” He said Donald Trump’s tax cuts would suck imports into the US and increase the size of the trade deficit 2019 by $150bn – a trend that could exacerbate trade tensions.
“The multilateral rules-based trade system that evolved after world war two and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart.” Obstfeld said there was more of a “phoney war” between the US and China than a return to the widespread use of tariffs in the Great Depression, but that there were signs that even the threat of protectionism was already harming growth. “That major economies are flirting with trade war at a time of widespread economic expansion may seem paradoxical – especially when the expansion is so reliant on investment and trade,” Obstfeld added.
The euro area’s economic expansion is standing on increasingly shaky ground after reports showed German investor confidence tumbling to its lowest level since late 2012 and the risk of a recession in the nation jumping. The sentiment gauge from ZEW showed more investors now see a worsening in Europe’s largest economy than forecast an improvement, a mood swing that ZEW President Achim Wambach blamed on the U.S. trade dispute combined with weak domestic retail and production numbers. The drop in confidence came as the Dusseldorf-based Macroeconomic Policy Institute (IMK) said the probability of a recession in Germany over the next three months has jumped to 32%.
While that outcome remains unlikely, the gauge is up sharply from 6.8% in March. It follows U.S. attempts to rewrite international trade rules by imposing import tariffs, triggering a tit-for-tat response by China. Even though the European Union has temporarily been exempted from the metal levies, risks of far-reaching retaliatory measures could still hurt Germany’s export-driven economy – feeding into signs that growth in the euro area is coming off its peak. At the IMK, the recession gauge, which uses data that have signaled downturns in the past is now orange – the middle of its traffic-light warning system – for the first time since March 2016. That was just as the German economy was entering a mild slowdown.
“Volatility in financial markets, which has been evident for several months, is now accompanied by a noticeable deterioration in sentiment and subdued production,” according to IMK. “This has recently become a typical constellation for the end phase of a cycle.”
The price of several cryptocurrencies took a sudden hit Tuesday over the course of 20 minutes, which some suspect may be the result of a single Bitcoin whale who unloaded over $50 million worth of the digital currency in one Bitfinex trade. The drop comes one day after the third largest bitcoin wallet also unloaded around $50 million of the digital currency. As Marketwatch first noted , “the balance of wallet 3D2oetdNuZUqQHPJmcMDDHYoqkyNVsFk9r — an anonymous digital account which is valued at $1.49 billion — fell by 6,500 bitcoin Tuesday, with the average sale price sale being $8,146.70, a total value of just over $50 million, according to bitinfocharts.”
The sale comes a day after the third-largest wallet, which famously purchased over $400 million in bitcoin in February, let go of 6,600 bitcoin at an average price of $8,026. Combined, the two whales unloaded over $100 million of bitcoin within 24 hours. As there was no immediate news or catalyst, some attributed the sale to Tuesday’s report that New York Attorney General Eric Schneiderman had launched an investigation into 13 cryptocurrency exchanges including Coinbase, Gemini and Bit Trust. The probe seeks information on fees, volume data and procedures governing margin trading among other things. However, the news hit some 4 hours prior to the sale.
One week ago, when the Trump administration unveiled the most draconian Russian sanctions yet which among others targeted Putin-ally Oleg Deripaska and the Russian oligarch’s aluminum giant, Rusal, we said that aluminum prices are going higher, much higher, for one reason: excluding China’s zombie producers, Rusal is the world’s largest producer of aluminum. Well, prices have since surged, largely as expected, and one week later we also learned just how “radioactive’ Rusal’s products have become as a result of the US sanctions: overnight Reuters reported that major Japanese trading houses asked the Russian aluminum producer to stop shipping refined aluminum and other products in light of U.S. sanctions on the world’s No.2 producer and are scrambling to secure metal elsewhere, according to industry sources.
“We have requested Rusal stop shipments of aluminum for our term contracts as we can’t make payment in U.S. dollars and we don’t want to take the risk of becoming a secondary sanction target by the United States,” said a source at a trading house [..] It is unclear how and where Japan can find alternative sources of aluminum: Japan buys about 300,000 tonnes of refined aluminum from Russia, about 16% of the nation’s total import, according to the Japan Aluminium Association. “Everyone has been on a search for substitutes and that pushed local spot premiums to around $200-$250 per tonne by last Friday,” he said. That’s sharply higher than Japan term premiums for April-June quarter shipments at $129 per tonne.
The contra-narrative about Assad’s alleged gas attack is gaining traction as the evidence comes in. It increasingly seems probable that some folks suffocated or were overcome with smoke inhalation and hypoxia (oxygen deprivation) when buildings, tunnels and underground bunkers collapsed into clouds of dust during the final battle for Douma last Saturday. Then the desperate remnant of the jihadist Army of Islam (Jaysh al-Islam) holed up there piled the bodies in a basement, spread shaving cream on their lips and proceeded to videotape furiously. Thereafter, they charged into a nearby hospital (which was treating hypoxia victims) with their video cameras in hand, yelling “chemical attack” while water-hosing one and all, thereby setting off the pandemonium seen on social media around the world.
We haven’t gotten to Douma yet to check out this contra-narrative, but an intrepid young reporter named Pearson Sharp did. Along with his camera crew, he visited the site of the attack, the hospital and the nearby rebel weapons dump – and interviewed dozens of people in the immediate vicinity. According to Sharp, none of them witnessed the alleged gas attack or believed it happened, and several personnel at the Douma hospital corroborated the phony water-dousing melee. Indeed, the head surgeon insisted to him that no one had died at the hospital from chemical agents. And he also saw and videoed room after room stacked with rockets, mortars and other military gear and filmed the debris and dilapidated remnants of buildings in the town.
[..] Self-evidently, a visiting Martian might have an altogether different interpretation of which nation had ventured down the “dark path” and which one was a “force for stability and peace”. And that would especially be the case with just a few more reports like the new missive from veteran war correspondent, Robert Fisk of the Independent (UK). Unlike young Mr. Pearson Sharp, Fisk has been a war correspondent in the Middle East for four decades and has won endless awards for reporting from the front lines. But his chops were earned when he became one of the few reporters in history to conduct face-to-face interviews with Osama bin Laden on three separate occasions during the 1990s.
Fisk’s dispatch filed Monday night speaks for itself and merits quoting at length because it not only skewers Washington’s narrative about Assad’s gas attack, but also provides vivid context: Whatever happened last Saturday erupted in the fog of war and could not possibly have been instantly assessed objectively or correctly by officials 6,000 miles away, who admit to having no “assets” on the ground in Damascus.
The fact that Philip May is both a Senior Executive of a hugely powerful investment firm, and privy to reams of insider information from the Prime Minister – knowledge which, when it becomes public, hugely affects the share prices of the companies his firm invests in – makes Mr May’s official employment a staggering conflict of interest for the husband of a sitting Prime Minister. However, aside from the ease at which he is able to glean insider information from his wife about potential decisions which could go on to make huge profits for his firm, there is a far darker conflict of interest that has so far gone undiscussed.
Philip May is a Senior Executive of Capital Group, an Investment Firm who buy shares in all sorts of companies across the globe – including thousands of shares in the world’s biggest Defence Firm, Lockheed Martin. According to Investopedia, Philip May’s Capital Group owned around 7.09% of Lockheed Martin in March 2018 – a stake said to be worth more than £7Bn at this time. Whilst other sources say Capital Group’s shareholding of Lockheed Martin may actually be closer to 10%. On the 14th April 2018, the Prime Minister Theresa May sanctioned British military action on Syria in response to an apparent chemical attack on the city of Douma – air strikes that saw the debut of a new type of Cruise Missile, the JASSM, produced exclusively by the Lockheed Martin Corporation.
The debut of this new – and incredibly expensive – weapon was exactly what US President Donald Trump was referring to when he tweeted that the weapons being fired on Syria would be “nice and new and ‘smart!’” Every single JASSM used in the recent bombing of Syria costs more than $1,000,000, and as a result of their widespread use during the recent bombing of Syria by Western forces, the share price of Lockheed Martin soared.
U.S. President Donald Trump voiced his support on Tuesday for Pastor Andrew Brunson, who is on trial in Turkey on charges he was linked to a group accused of orchestrating a failed 2016 military coup, in a case that has compounded strains in U.S.-Turkish relations. “Pastor Andrew Brunson, a fine gentleman and Christian leader in the United States, is on trial and being persecuted in Turkey for no reason,” Trump tweeted. “They call him a spy, but I am more a spy than he is. Hopefully he will be allowed to come home to his beautiful family where he belongs!” Brunson, a Christian pastor from North Carolina who has lived in Turkey for more than two decades, was indicted on charges of helping the group that Ankara holds responsible for the failed 2016 coup against President Tayyip Erdogan.
He faces up to 35 years in prison. Brunson has been the pastor of Izmir Resurrection Church, serving a small Protestant congregation in Turkey’s third largest city. Brunson’s trial is one of several legal cases roiling U.S.-Turkish relations. The two countries are also at odds over U.S. support for a Kurdish militia in northern Syria that Turkey considers a terrorist organization. Washington has called for Brunson’s release while Erdogan suggested last year his fate could be linked to that of U.S.-based Muslim cleric Fethullah Gulen, whose extradition Ankara has repeatedly sought to face charges over the coup attempt.
New refugee and migrant arrivals in Greece will soon be able to move around the country freely without being restricted to the islands of the eastern Aegean where they arrive from neighboring Turkey, according to a Council of State ruling that emerged on Tuesday and upends a 2016 decision by the Greek asylum service that forced them to remain in so-called hotspots until their asylum application was processed. According to the leaked ruling by the country’s highest administrative court, there are no reasons of public interest or migration policy to justify their geographical restriction to the islands of Lesvos, Chios, Samos, Leros, Kos and Rhodes.
Migration Policy Minister Dimitris Vitsas said he would comment on the ruling once he is informed of it officially. Once the ruling is published, new refugees who apply for asylum will be allowed to reside in any part of the country they choose. The asylum service’s May 2016 decision restricting migrants to the Aegean islands was challenged by the Greek Council for Refugees, an NGO which filed an appeal for its cancellation. “The imposition of restrictions on movement blocked the distribution of those people throughout Greek territory and resulted in their unequal concentration in specific regions and the significant burdening and decline of those regions,” the court said in its reasoning.
However, taking into account the large number of arrivals, the court said the ruling does not have a retroactive effect, which means it will not relate to the refugees who are already languishing in reception centers. The so-called hotspots have been operating beyond capacity and the country is now witnessing a fresh spike in arrivals of often flimsy boats carrying desperate passengers from Turkey.
We all know, in theory, that we ought to use less plastic. We’ve all been distressed by the sight of Blue Planet II’s hawksbill turtle entangled in a plastic sack, and felt chastened as we’ve totted up our weekly tally of disposable coffee cups. But still, UK annual plastic waste is now close to 5m tonnes, including enough single-use plastic to fill 1,000 Royal Albert Halls; the government’s planned elimination of “avoidable” plastic waste by 2042 seems a quite dazzling task. It was reported this week that scientists at the University of Portsmouth have accidentally developed a plastic-eating mutant enzyme, and while we wait to see if that will save us all, for one individual the realisation of just how much plastic we use has become an intensely personal matter.
One early evening in mid-2016, Daniel Webb, 36, took a run along the coast near his home in Margate. “It was one of those evenings where the current had brought in lots of debris,” he recalls, because as Webb looked down at the beach from his route along the promenade he noticed a mass of seaweed, tangled with many pieces of plastic. “Old toys, probably 20 years old, bottles that must have been from overseas because they had all kinds of different languages on them, bread tags, which I don’t think had been used for years …” he says. “It was very nostalgic, almost archaeological. And it made me think, as a mid-30s guy, is any of my plastic out there? Had I once dropped a toy in a stream near Wolverhampton, where I’m from, and now it was out in the sea?”
Webb decided that he would start a project to keep all the plastic he used in the course of an entire year. He would not modify his plastic consumption in that time (although he had already given up buying bottled water), and each item would be carefully washed and stored in his spare room.
Daniel Webb in front of his Mural-by-the-Sea. Photo: Ollie Harrop 2018/Everyday Plastic
More than 30 kg of plastic, mainly plastic bags, were found in the stomach of the whale that was washed out on the island of Santorini last week. The conducted autopsy showed that the huge mammal died of a gastric shock. The whale was unable to digest or excrete the rubbish through its digestive system. The problem caused peritonitis inflammation in its intestines that led to the animal’s death, local media report. The dead whale brings back to the spotlight the problem of tonnes of plastic landing into the waters, polluting the environment and leading to death of marine life. The body of the 9-meter long sperm whale – or Physeter macrocephalus as the scientific name is – was washed ashore on Akrotiri area on the island of Santorini in the Aegean island group of Cyclades on April 10th. The body weighting more than 7 tones was in condition of advanced sepsis.
Wall Street bears are sounding alarms about a recent drop in non-investment-grade bonds, popularly referred to as junk bonds. The SPDR Bloomberg Barclays High Yield Bond ETF, an exchange-traded fund that tracks junk bonds, is on track to finished at its lowest level since March 24. Another well known junk-bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF also carved out late-March nadir, according to FactSet data. Both ETFs fell below their 200-day moving averages early this month, signaling that momentum in fixed-income products is bearish. Technical analysts tend to follow short- and long-term averages in an asset to help determine bullish and bearish trends. The moves for JNK and HYG, referencing their widely used tickers, come as the S&P 500 index and the Dow Jones Industrial Average have been testing fresh highs.
Normally, junk bonds and stocks are positively correlated, or move in the same direction, because junk bonds are considered a proxy for risk appetite in the market. Junk bonds had been drawing interest, particularly in an environment of ultralow bonds, with the 10-year Treasury and the 30-year Treasury bond offering yields below their historic averages, even as the Federal Reserve embarks upon efforts to lift interest rates from crisis-era levels. Bonds with the highest yields tend to be the riskiest and therefore offer a commensurate compensation in exchange for that perceived risk. Bond prices and yields move in opposition. However, a recent divergence between junk bonds and stocks, taking hold in late October, has raised eyebrows among Wall Street investors.
The legacy of the soon-to-retire PBoC governor, Zhou Xiochuan, will be that in sharp contrast to his western brethren, he warned that China’s credit bubble would burst before the fact. Two weeks ago, Zhou warned during the Party Congress that China’s financial system could be heading for a “Minsky moment” due to high levels of corporate debt and rapidly rising household debt. “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.” Perhaps sensing that nobody in the Middle Kingdom was paying attention, we noted two days ago his lengthy essay published on the PBoC website. It contained another warning that latent risks are accumulating in the Chinese system, including some that are “hidden, complex, contagious and hazardous.”
He also highlighted “debt finance disguised as equity” as a concern. Talking of which, there’s a new growth market in the gargantuan Chinese corporate debt market – we are referring to perpetual notes. Are you ready for the clever part about perpetual notes – they are debt but it’s permissible under Chinese accounting regulations to classify them as “equity” – et voila, corporate gearing has fallen. Under pressure to trim borrowings, China’s companies have found a way to reduce their lofty debt burdens – even if some of the risk remains. Sales of perpetual notes – long-dated securities that can be listed as equity rather than debt on balance sheets given that in theory they could never mature – have soared to a record this year as Beijing zeros in on leverage and the threat it poses to the financial system.
The bonds are so popular that issuance by non-bank firms has jumped to the equivalent of 433 billion yuan ($65 billion), more than seven times sales by companies in the U.S. “Chinese issuers love perpetual bonds because they are under great pressure to deleverage,” said Wang Ying, a senior director at Fitch Ratings in Shanghai. “Sophisticated investors should do their homework and shouldn’t be misled by the numbers in accounting books.
China took a major step toward the long-awaited opening of its financial system, removing foreign ownership limits on its banks and asset-management companies, and allowing overseas firms to take majority stakes in local securities ventures and insurers. Regulators are drafting detailed rules, which will be released soon, Vice Finance Minister Zhu Guangyao said at a briefing in Beijing on Friday. Foreign firms will be allowed to own up to 51% in securities ventures and life-insurance companies, caps that will be removed gradually over time, he said. China’s steps look poised to end years of frustration for foreign banks, who have long been marginal players in Asia’s largest economy. The announcement could be seen as a major win for U.S. President Donald Trump, whose first official visit to China was followed by a string of Sino-U.S. deals.
“This is a milestone in China’s progress of opening up its economy,” said Larry Hu at Macquarie in Hong Kong. Announcing this during Trump’s visit shows the world that “China and the U.S. are in a business and trade cooperation rather than confrontation,” Hu said. On Thursday, China’s Foreign Ministry foreshadowed the latest moves, with a statement saying that entry barriers to sectors such as banking, insurance, securities and funds will be “substantially” eased. Those comments came following a meeting between Trump and his counterpart Xi Jinping. The moves would be encouraging to foreign banks, asset managers and insurers, who have long been kept on the margins in China, the world’s second-largest economy, by various barriers. Global banks are currently limited to owning 49% of local securities joint ventures, frustrating their attempts to compete effectively with Chinese rivals.
It’s not enough to say, in response to the Paradise Papers revelations, that we already knew that rich people parked their money in offshore tax havens, where their piles accumulate far from the scrutiny of our government. Nor is it enough to say that we were already aware that we live in a time of “inequality.” What we have learned this week is the clinical definition of the word. What we have learned is how much the rich and the virtuous have been hiding away and where they’re hiding it. Yes, there are sinister-looking Russian capitalists involved. But there’s also our favorite actors and singers. Our beloved alma mater, supposedly a charitable institution. Everyone with money seems to be in on it. We’re also learning that maybe we’ve had it backwards all along.
Tax havens on some tropical island aren’t some sideshow to western capitalism; they are a central reality. Those hidden billions are like an unseen planet whose gravity is pulling our politics and our economy always in a certain direction. And this week we finally began to understand what that uncharted planet looks like; we started to grasp its mass and its power. Think about it like this. For decades Americans have been erupting in anger at what they can see happening to their beloved middle-class world. We think we know what the culprit is; we can see it vaguely through a darkened glass. It’s “elitism.” It’s a “rigged system.” It’s people who think they’re better than us. And for decades we have lashed out. At the immigrant next door. At Jews. At Muslims. At school teachers. At public workers who are still paid a decent wage. Our fury, unrelenting, grows and grows.
We revolt, but it turns out we have chosen the wrong political leader. We revolt again: this time, the leader is even worse. This week we are coming face to face with a big part of the right answer: it’s that the celebrities and business leaders we have raised up above ourselves would like to have nothing to do with us. Yes, they are grateful for the protection of our laws. Yes, they like having the police and the Marine Corps on hand to defend their property. Yes, they eat our food and breathe our air and expect us to keep these pure and healthy; they demand that we get educated before we may come and work for them, and for that purpose they expect us to pay for a vast system of public schools. They also expect us to watch their movies, to buy their products, to use their software. They expect our (slowly declining) middle class to be their loyal customers.
[..] Our leaders raised up a tiny class of otherworldly individuals and built a paradise for them, made their lives supremely delicious. Today they hold unimaginable and unaccountable power. We endure potholes and live in fear of collapsing highway bridges because our leaders wanted these very special people to have an even larger second yacht. Our kids sit in overcrowded classrooms in underfunded schools so that a handful of exalted individuals can relax on their own private beach. Today it is these same golden figures with their offshore billions who host the fundraisers, hire the lobbyists, bankroll the think tanks and subsidize the artists and intellectuals. This is their democracy today. We just happen to live in it.
Steve Keen, Professor of Economics at Kingston University says the findings of the so-called Paradise Papers haven’t been surprising as “Tax evasion by the wealthy has been going on for decades, and we’ll never stop it. “We simply have to find a way to bring tax revenue back into the government that they can’t evade. And it will always manage to evade income tax,” he told RT. Keen adds though that it won’t be easy to stop this thing from happening. Partly that’s “because we don’t understand how taxation actually works.” “We think taxation is necessary to finance government spending. In fact, the government can spend regardless of taxation – the taxation simply takes large amounts of the money out of the system that government has spent into it because if we didn’t tax, we would have a risk of inflation.”
“Once you look at it that way, what the rich are actually doing – are siphoning off money that has been created by the government, accumulating it in offshore accounts and hanging onto the wealth, which should be recycled back into the economy. So the only way we can really stop it – is by forgetting about taxing them with income. Income tax works for workers – it doesn’t work for a corporation; it doesn’t work for the wealthy. We should tax them on transactions, and then they can’t evade unless they stop having transactions. If they stop having transactions, they will stop being wealthy,” he said. RT: What are the chances of that happening? SK: It just takes politicians to understand how money is created. So I think it is almost virtually impossible. They continue spreading this myth that they have got to tax us to be able to spend, running austerity, which is unnecessary. All this fits in to actually loading the pockets of the rich. Maybe there is a connection…
Let’s talk about some numbers there. To put this into a broader context, the Tax Justice Network did a study a couple of years ago. They determined that between $21 and $31 trillion is held offshore. This means that hundreds of billions of dollars of taxes go uncollected. It means those who are paying tax are paying for the entire tax burden for various countries infrastructures, military, etc. You end up with what I would call apartheid, where you have got approximately 200,000 people in the world, who pay no tax and are able to invest without paying any tax. So they are compounding money at 20-22% a year without paying tax. So the billionaire class is escalating, we know this.
Meanwhile, the poverty levels are continuing to rise because people are being ripped off by these corrupt countries in cahoots with these billionaires, who are placing the entire cost of running a society on those who can least afford it. And into the mix comes the social uprising – more violence, because naturally, if you have everything stolen from you, you have nothing to lose, so you become violent. Now, to specifically answer your question about Russia being targeted by selectively picking out … here’s an elegant phrase – you’re trying to pick a fly poop from the pepper. So they look at this big scattershot of information, and with little tweezers, they try to pick out what they perceive to be incriminating data points.
Then they build a scenario, and then the corporations that are owned by the same people that are hiding the wealth… There are only approximately six major media companies in America. Those are owned by the same kleptocrats that are hiding all these billions of dollars. They then put that story out there to deflect and confuse the average mainstream media watcher that “oh my Gosh, Russia is involved in this scandal! Russia is involved in Black Lives Matter! Russia is involved with Hillary losing the election because she is completely inept. Russia, Russia, Russia…”
More than $300m of cryptocurrency has been lost after a series of bugs in a popular digital wallet service led one curious developer to accidentally take control of and then lock up the funds, according to reports. Unlike most cryptocurrency hacks, however, the money wasn’t deliberately taken: it was effectively destroyed by accident. The lost money was in the form of Ether, the tradable currency that fuels the Ethereum distributed app platform, and was kept in digital multi-signature wallets built by a developer called Parity. These wallets require more than one user to enter their key before funds can be transferred. On Tuesday Parity revealed that, while fixing a bug that let hackers steal $32m out of few multi-signature wallets, it had inadvertently left a second flaw in its systems that allowed one user to become the sole owner of every single multi-signature wallet.
The user, “devops199”, triggered the flaw apparently by accident. When they realised what they had done, they attempted to undo the damage by deleting the code which had transferred ownership of the funds. Rather than returning the money, however, that simply locked all the funds in those multisignature wallets permanently, with no way to access them. “This means that currently no funds can be moved out of the multi-sig wallets,” Parity says in a security advisory. Effectively, a user accidentally stole hundreds of wallets simultaneously, and then set them on fire in a panic while trying to give them back. Some are pushing for a “hard fork” of Ethereum, which would undo the damage by effectively asking 51% of the currency’s users to agree to pretend that it had never happened in the first place.
That would require a change to the code that controls ethereum, and then that change to be adopted by the majority of the user base. The risk is that some of the community refuses to accept the change, resulting in a split into two parallel groups. Such an act isn’t unheard of: another hack, two years ago, of an Ethereum app called the DAO resulted in $150m being stolen. The hard fork was successful then, but the money stolen represented a much larger portion of the entire Ethereum market than the $300m lost to Parity. The lost $300m follows the discovery of bug in July that led to the theft of $32m in ether from just three multisignature wallets. A marathon coding and hacking effort was required to secure another $208m against theft. Patching that bug led to the flaw in Parity’s system that devops199 triggered by accident.
Growers in Brazil’s largest soybean producing state Mato Grosso have asked a court to cancel Monsanto’s Intacta GMO seed patent. They claim irregularities, including the company’s alleged failure to prove it brings de facto technological innovation. The Mato Grosso branch of Aprosoja, the association representing the growers, has filed a lawsuit in a federal court in Brasilia. The growers claim Monsanto’s Intacta RR2 PRO patent “does not fully reveal the invention so as to allow, at the end of the exclusivity period, for any person to freely have access to it.” That requirement “avoids that a company controls a technology for an undetermined period of time,” Aprosoja said, adding Intacta’s patent protection extends through October 2022. It cited data from consultancy Agroconsult, saying that about 53% of Brazil’s soy area was planted with Intacta technology in the 2016/17 crop cycle.
Around 40% of the crop is grown with Monsanto’s Roundup Ready seed technology (Intacta’s predecessor), and only seven% is non-GM. Brazilian farmers have been continually urging the replacement of genetically modified soybeans with non-GM seeds. Recently they asked Monsanto and other producers of pest-resistant corn seeds to reimburse them for money spent on additional pesticides when the bugs killed the crops instead of dying. Several years ago five million Brazilian soybean farmers sued Monsanto, claiming the genetic-engineering company was collecting royalties on crops it unfairly claims as its own. In 2012, the Brazilian court ruled in favor of the Brazilian farmers, saying Monsanto owes them at least $2 billion since 2004. After the legal disputes, Monsanto stopped collecting royalties linked to its first-generation Roundup Ready technology, and some farmers agreed to get a discount rate to use Intacta seeds.
[..] as the Wall Street Journal points out today, after allegedly wiping out millions of acres of farm ground across the Midwest, Monsanto once again finds itself in a familiar spot: the courtroom. Monsanto’s new version of the herbicide called dicamba is part of a more than $1 billion investment that pairs it with new genetically engineered seeds that are resistant to the spray. But some farmers say their nonresistant crops suffered after neighbors’ dicamba drifted onto their land. The agricultural giant in October sued the Arkansas State Plant Board following the board’s decision to bar Monsanto’s new herbicide and propose tougher restrictions on similar weed killers ahead of the 2018 growing season. Monsanto claims its herbicide is being held to an unfair standard.
Arkansas has been a flashpoint in the dispute: About 900,000 acres of crops were reported damaged there, more than in any other state. About 300 farmers, crop scientists and other attendees gathered in Little Rock on Wednesday for a hearing on Arkansas’s proposed stiffer dicamba controls, which Monsanto and some farmers are fighting. The proposed restrictions are subject to the approval of a subcommittee of state legislators.
As we pointed out previously, the EPA has reported that farmers in 25 states submitted more than 2,700 claims to state agricultural agencies that neighbors’ dicamba spraying shriveled 3.6 million acres of soybeans. The herbicide is also blamed for damaging other crops, such as cantaloupe and pumpkins. The massive crop damage prompted Arkansas’s Plant Board to propose the idea of prohibiting dicamba use from mid-April through the end of October to safeguard growing plants. The state has also refused to approve Monsanto’s dicamba product for use in Arkansas, saying it needs further analysis by University of Arkansas researchers.
Of course, delays didn’t sit well with Monsanto which stands to make some $350 million a year in dicamba and related seed sales according to Jonas Oxgaard, an analyst with Bernstein who described the products as “their big moneymaker.” Meanwhile, farmers are exploring their own legal options with some joining a class-action lawsuit against Monsanto and BASF, seeking compensation for damaged crops.
When Saad Hariri’s jet touched down at Riyadh on the evening of 3 November, the first thing he saw was a group of Saudi policemen surrounding the plane. When they came aboard, they confiscated his mobile phone and those of his bodyguards. Thus was Lebanon’s prime minister silenced. It was a dramatic moment in tune with the soap-box drama played out across Saudi Arabia this past week: the house arrest of 11 princes – including the immensely wealthy Alwaleed bin Talal – and four ministers and scores of other former government lackeys, not to mention the freezing of up to 1,700 bank accounts. Crown Prince Mohamed bin Salman’s “Night of the Long Knives” did indeed begin at night, only hours after Hariri’s arrival in Riyadh. So what on earth is the crown prince up to?
Put bluntly, he is clawing down all his rivals and – so the Lebanese fear – trying to destroy the government in Beirut, force the Shia Hezbollah out of the cabinet and restart a civil war in Lebanon. It won’t work, for the Lebanese – while not as rich – are a lot smarter than the Saudis. Every political group in the country, including Hezbollah, are demanding one thing only: Hariri must come back. As for Saudi Arabia, those who said that the Arab revolution will one day reach Riyadh – not with a minority Shia rising, but with a war inside the Sunni Wahhabi royal family – are watching the events of the past week with both shock and awe. But back to Hariri. On Friday 3 November, he was in a cabinet meeting in Beirut. Then he received a call, asking him to see King Salman of Saudi Arabia.
Hariri, who like his assassinated father Rafiq, holds Saudi as well as Lebanese citizenship, set off at once. You do not turn down a king, even if you saw him a few days’ earlier, as Hariri had. And especially when the kingdom owes Hariri’s “Oger” company as much as $9bn, for such is the commonly rumoured state of affairs in what we now call “cash-strapped Saudi Arabia”. But more extraordinary matters were to come. Out of the blue and to the total shock of Lebanese ministers, Hariri, reading from a written text, announced on Saturday on the Arabia television channel – readers can guess which Gulf kingdom owns it – that he was resigning as prime minister of Lebanon. There were threats against his life, he said – though this was news to the security services in Beirut – and Hezbollah should be disarmed and wherever Iran interfered in the Middle East, there was chaos.
[..] Of course, the real story is just what is going on in Saudi Arabia itself, for the crown prince has broken forever the great compromise that exists in the kingdom: between the royal family and the clergy, and between the tribes. This was always the bedrock upon which the country stood or fell. And Mohamed bin Salman has now broken this apart. He is liquidating his enemies – the arrests, needless to say, are supposedly part of an “anti-corruption drive”, a device which Arab dictators have always used when destroying their political opponents.
Saudi Arabia is stopping food and aid from getting into Yemen, in a move that the United Nations said will be “catastrophic” for a country already facing world’s worst humanitarian crisis. Saudi Arabia shut down all access points to Yemen by air, land, and sea over the weekend, in what they say is an attempt to to curb arms trafficking from Iran to Houthi rebels after an intercepted missile landed on the outskirts Riyadh. “The Coalition Forces Command decided to temporarily close all Yemeni air, sea and land ports,” the coalition said in a statement on the Saudi state news outlet SPA. The Kingdom’s lock down means critical humanitarian aid like medical supplies, food, and water, are not getting into the country. Aid workers decried the decision, warning of “dire” consequences for a country where millions of people rely on humanitarian aid to stay alive.
“Humanitarian supply lines to Yemen must remain open,” urged Robert Mardini, the International Committee of the Red Cross’s regional director for the Near and Middle East. “Food, medicine and other essential supplies are critical for the survival of 27 million Yemenis already weakened by a conflict now in its third year.” Mardini said that shipments of chlorine tablets, used to tackle the spread of cholera, were stopped at the country’s northern border. “That lifeline has to be kept open and it is absolutely essential that the operation of the United Nations Humanitarian Air Service (UNHAS) be allowed to continue unhindered,”Jens Laerke, a spokesperson for the UN Office for the Coordination of Humanitarian Affairs (OCHA) told reporters Tuesday.
There is something mysterious and hot lurking beneath the surface of the Antarctic ice. Now Nasa says that it might have found the source of that strange heating – a “mantle plume” – or upwelling of abnormally hot rock, that lies deep beneath the surface. The heat is causing the surface of the ice to melt and crack, resulting in rivers and other disruption to Antarctica. Around 30 years ago, a scientist at the University of Colorado Denver said that there might be a mantle plume under a region of the continent known as Marie Byrd Land. That hypothesis helped explain some strange features seen on the ice, like volcanic activity and a dome. Mantle plumes are narrow streams through which hot rock rises up from the Earth’s mantle, and then spreads out under the crust. Because the material itself is hot and buoyant, it makes the crust bulge upwards.
They explain how some places – like Hawaii and Yellowstone – have huge amounts of geothermal activity despite being far from the edge of a tectonic plate. But it was also an idea that was hard to believe, since the ice above the plume is still there. “I thought it was crazy,” said Helene Seroussi of Nasa’s Jet Propulsion Laboratory, who helped the lead work. “I didn’t see how we could have that amount of heat and still have ice on top of it.” Now scientists have used the latest techniques to support the idea. The team developed a mantle plume numerical model to look at how much geothermal heat would be needed to explain what is seen at Marie Byrd Land, including the dome and the giant subsurface rivers and lakes present on Antarctica’s bedrock.
The recalculation of pensions paid out to people who have already retired will likely lead to major cuts for pensioners of the former Traders’ Fund (TEBE/OAEE) and the civil servants’ fund, as well as those who used to work at banks and state firms. According to data presented to the country’s creditors by the Labor Ministry, three-quarters of the recalculations have been completed, while the process is expected to finish by year-end. The cuts will be implemented from January 1, 2019, but the country’s 2.6 million pensioners should learn by how much their income will suffer by the middle of next year, as Athens has told the creditors it will inform all pensioners by June 2018.
Legally, the cuts cannot exceed 18%, even if the pensioner’s so-called personal difference – i.e. the margin between the pension they secured in the past and the amount a new pensioner would receive – is greater. The law also provides for the abolition of allowances for spouses and children, which a large share of pensioners receive. Kathimerini understands the recalculation results will lead to major cuts mainly for pensioners who had high salaries but few years of service, as well as widows.
The EU Council and the European Commission must work urgently with Greece to prevent a humanitarian crisis this winter, according to the he Progressive Alliance of Socialists and Democrats (S&D) Group in the European Parliament. The group called for a debate in the parliament’s plenary session next week in Strasbourg. “Thousands of people seeking asylum on the Greek islands still do not have adequate protection for the coming cold months,” said S&D Group President Gianni Pittella.
“Many are still sleeping in light tents designed for summer weather, without sleeping bags, on thin mats or even on the ground. EU governments need to immediately stop sending back refugees to Greece under the Dublin mechanism; which is creating further strain on the Greek asylum system. If we do not act and refugees die from the cold, as they did last year, then their blood will be on our hands.” Pittella was also quick to stress that all EU member states must fulfill their obligations to relocate refugees from Greece. “A legal decision has been taken by the EU, and this must be fully respected. Relocation is the only way of taking these people out of limbo and allowing them to get on with rebuilding their lives.”
Sean Parker, the founding president of Facebook, gave me a candid insider’s look at how social networks purposely hook and potentially hurt our brains. Be smart: Parker’s I-was-there account provides priceless perspective in the rising debate about the power and effects of the social networks, which now have scale and reach unknown in human history. He’s worried enough that he’s sounding the alarm. Parker, 38, now founder and chair of the Parker Institute for Cancer Immunotherapy, spoke yesterday at an Axios event at the National Constitution Center in Philadelphia, about accelerating cancer innovation. In the green room, Parker mentioned that he has become “something of a conscientious objector” on social media. By the time he left the stage, he jokingly said Mark Zuckerberg will probably block his account after reading this:
“When Facebook was getting going, I had these people who would come up to me and they would say, ‘I’m not on social media.’ And I would say, ‘OK. You know, you will be.’ And then they would say, ‘No, no, no. I value my real-life interactions. I value the moment. I value presence. I value intimacy.’ And I would say, … ‘We’ll get you eventually.'”
“I don’t know if I really understood the consequences of what I was saying, because [of] the unintended consequences of a network when it grows to a billion or 2 billion people and … it literally changes your relationship with society, with each other … It probably interferes with productivity in weird ways. God only knows what it’s doing to our children’s brains.”
“The thought process that went into building these applications, Facebook being the first of them, … was all about: ‘How do we consume as much of your time and conscious attention as possible?'” “And that means that we need to sort of give you a little dopamine hit every once in a while, because someone liked or commented on a photo or a post or whatever. And that’s going to get you to contribute more content, and that’s going to get you … more likes and comments.”
“It’s a social-validation feedback loop … exactly the kind of thing that a hacker like myself would come up with, because you’re exploiting a vulnerability in human psychology.”
“The inventors, creators — it’s me, it’s Mark [Zuckerberg], it’s Kevin Systrom on Instagram, it’s all of these people — understood this consciously. And we did it anyway.”
JPMorgan CEO Jamie Dimon has two big pronouncements as the Trump administration starts reshaping the government: “The United States of America is truly an exceptional country,” and “it is clear that something is wrong.” Dimon, leader of world’s most valuable bank and a counselor to the new president, used his 45-page annual letter to shareholders on Tuesday to list ways America is stronger than ever – before jumping into a much longer list of self-inflicted problems that he said was “upsetting” to write. Here’s the start: Since the turn of the century, the U.S. has dumped trillions of dollars into wars, piled huge debt onto students, forced legions of foreigners to leave after getting advanced degrees, driven millions of Americans out of the workplace with felonies for sometimes minor offenses and hobbled the housing market with hastily crafted layers of rules.
Dimon, who sits on Donald Trump’s business forum aimed at boosting job growth, is renowned for his optimism and has been voicing support this year for parts of the president’s business agenda. In February, Dimon predicted the U.S. would have a bright economic future if the new administration carries out plans to overhaul taxes, rein in rules and boost infrastructure investment. In an interview last month, he credited Trump with boosting consumer and business confidence in growth, and reawakening “animal spirits.” But on Tuesday, reasons for concern kept coming. Labor market participation is low, Dimon wrote. Inner-city schools are failing poor kids. High schools and vocational schools aren’t providing skills to get decent jobs. Infrastructure planning and spending is so anemic that the U.S. hasn’t built a major airport in more than 20 years.
Corporate taxes are so onerous it’s driving capital and brains overseas. Regulation is excessive. “It is understandable why so many are angry at the leaders of America’s institutions, including businesses, schools and governments,” Dimon, 61, summarized. “This can understandably lead to disenchantment with trade, globalization and even our free enterprise system, which for so many people seems not to have worked.”
By many measures, the U.S. housing market seems in very good shape. The National Association of Realtors in Washington said last week that contracts to buy existing homes jumped 5.5% in February, the biggest increase since July 2010. Fannie Mae’s National Housing Survey showed that Americans expect home prices to rise a robust 3.2% over the next year as its sentiment index reached a record high. So, are boom times ahead for housing? Not quite. To understand why, it helps to revisit recent history. The housing bubble of the early 2000s was driven by subprime mortgages and other loose-lending practices. The subsequent collapse left many potential new homeowners with inadequate credit scores, not enough money for a down payment and insufficient job security to buy a house.
They also saw, for the first time since the 1930s, that not only house prices fall nationwide, but nosedive by a third. Homeownership plunged and those who did form households moved into rental apartments instead of single-family houses. That drove rental vacancy rates down and starts of multi-family housing – about two-thirds of which are rentals – up to 396,000 units, more than the earlier norm of 300,000 starts at annual rates. But single-family housing starts – even with the rebound to an 872,000 annual rate from the bottom of about 400,000 – are still far below the pre-housing bubble average of more than 1 million. Despite the recovery in house prices, rents have risen at a much faster pace. As a share of median income, rents have jumped while mortgage costs have fallen. The latest data from the National Association of Realtors show its Housing Affordability Index was up 52% in the fourth quarter of 2016 from the early 2007 low.
There’s no shortage of theories as to how and why today’s young people differ from their parents. As marketing consultants never cease to point out, baby boomers and millennials appear to have starkly different attitudes about pretty much everything, from money and sports to breakfast and lunch. New research tries to ground those observations in solid data. The National Center for Family and Marriage Research at Bowling Green State University set out to compare 25- to 34-year-olds in 1980—baby boomers—with the same age group today. Researcher Lydia Anderson compared U.S. Census data from 1980 with the most recent American Community Survey data in 2015. The results reveal some stark differences in how young Americans are living today, compared with three or four decades ago.
In 1980, two-thirds of 25- to 34-year-olds were already married. One in eight had already been married and divorced. In 2015, just two in five millennials were married, and only 7% had been divorced. Baby boomers’ eagerness to get married meant they were far more likely than today’s young people to live on their own. Anderson looked at the share of each generation living independently, either as heads of their own household or in married couples. The chance that Americans in their late twenties and early thirties live with parents or grandparents has more than doubled. In 1980, just 9% of 25- to 34-year-olds were doing so. In 2015, 22% lived with parents or grandparents. Millennials are also less likely than boomers to be living with kids—and to be homeowners.
It’s easy to look at these figures and say millennials are lagging behind their boomer parents. However, even as young Americans delay marriage, kids, and homeownership, they’re ahead of their parents by one measure: education.
Dazzling. “Historically, when the amount of paper exceeds the amount of underlying commodity that is available for delivery by more than 20-30%, the CFTC intervenes by investigating the possibility of market manipulation. But never with gold and silver.”
If you were to poll the public about comparing the investment returns between gold, silver and stocks during the first quarter of 2017, it’s highly probable that the majority of the populace would respond that the S&P 500 outperformed the precious metals. That’s a result of the mainstream media’s unwillingness to report on the precious metals market other than to disparage it as an investment. In reality, among silver, gold, the Nasdaq 100 and the S&P 500, the S&P 500 had the lowest ROR in Q1. Silver led the pack at 14%, followed by tech-heavy Nasdaq 100 at 11.1%, gold at 8.6% and the S&P 500 at 4.8%. Put that in your pipe and smoke it, Cramer. Imagine the performance gold and silver would have turned in if the Comex was prevented from creating paper gold and silver in amounts that exceeded the quantity of gold and silver sitting in the Comex vaults.
As an example, as of Friday the Comex is reporting 949k ozs of gold in the registered accounts of the Comex vaults and 9 million ozs of total gold. Yet, the open interest in paper gold contracts as of Friday totaled 41.7 million ozs. This is 44x more paper gold than the amount of physical that has been designated – “registered” – as available for delivery. It’s 4.6x more than the total amount of gold sitting on Comex vaults. With silver the situation is even more extreme. The Comex is reporting 29.5 million ozs of silver as registered and 190.2 million total ozs. Yet, the open interest in paper silver is a staggering 1.08 billion ozs. 1.08 billion ozs of silver is more silver than the world mines in a year. The paper silver open interest is 5x greater than the total amount of silver held in Comex vaults; it’s an astonishing 37x more than the amount of silver that is available to be delivered.
This degree of imbalance between the open interest in CME futures contracts in relation to the amount of the underlying physical commodity represented by those contracts never occurs in any other CME commodity – ever. Historically, when the amount of paper exceeds the amount of underlying commodity that is available for delivery by more than 20-30%, the CFTC intervenes by investigating the possibility of market manipulation. But never with gold and silver. The Comex is perhaps the most corrupted securities market in history. It is emblematic of the fraud and corruption that has engulfed the entire U.S. financial and political system. The U.S. Government has now issued $20 trillion in Treasury debt for which it has no intention of every redeeming. It’s issued over $100 trillion in unfunded liabilities (entitlements, pensions, etc) for which default is not a matter of “if” but of “when.”
Wall Street Journal editorialist Kimberley A. Strassel poses the real question: Why hasn’t the Trump administration had the Secret Service arrest Comey, Brennan, Schiff, the DNC and Hillary for trying to overthrow the President of the United States? “Mr. Nunes has said he has seen proof that the Obama White House surveilled the incoming administration—on subjects that had nothing to do with Russia—and that it further unmasked (identified by name) transition officials. This goes far beyond a mere scandal. It’s a potential crime.” What we are watching is turning out to be traces of a plot against a government elected by the American people. Attempts by House national security committee Chairman Devin Nunes have been countered with demands by his potential victims to recuse himself so as to stop his exposé of how “Team Obama was spying broadly on the incoming administration.”
[..] We are now in a position to see the real story behind “Russiagate.” It’s not about Russia, except incidentally. The Obama regime abused the government’s surveillance powers and spied on Donald Trump and other Republicans in order to build a dossier for the DNC to leak to the press in an attempt to slander or compromise Trump and throw the election to Hillary. They’ve been caught, but we can now see that they took steps to protect themselves against this. They prepared a cover story. They pretend they were not spying on Trump, but on Russians – which only by fortuitous happenchance turned up incriminating smoke against Trump. This cover story was buttressed by the fake news story prepared by former MI6 freelancer Christopher Steele.
As Whitney reports, Steele “was hired as an opposition researcher last June to dig up derogatory information on Donald Trump.” Unvetted and unverified information paid for by so-called informants “somehow” found its way into U.S. intelligence agency reports. These reports were then leaked to Democrat-friendly media. This is where the crime lies. Obama regime and DNC were using these agencies for domestic political use, KGB style. The Obama/Clinton cover story is now falling to pieces. That explains the desperation in the attack by Adam Schiff, the ranking Democrat on the House Intelligence Committee, on Committee Chairman Devin Nunes to stop the exposure. Russiagate is not a Trump/Putin collusion but a domestic spy job carried out by Democrats. Law requires Trump to arrest those responsible and to put them on trial for treason and conspiracy to overthrow the government of the United States.
The Federal Reserve’s inspector general says it will be ending its investigation into the 2012 release of confidential information. Even after the scandal cut short the career of one top Fed official, the answer to the most important question remains a mystery. Who did the initial leaking? Richmond Fed President Jeffrey Lacker resigned abruptly Tuesday as he announced his role in the unauthorized disclosure of information to Medley Global Advisors about policy options that the central bank was considering in 2012. His explanation suggested he was confirming facts the Medley analyst already knew. It was a sudden career stop for a Fed president who was frequently in opposition to the Fed board consensus on interest-rate policy, and the news will likely revive questions in Congress about the value of the central bank’s discretion and transparency.
“The story is not over today,” said Andrew Levin, a professor at Dartmouth College who was previously a special adviser at the Fed board and helped then-Vice Chair Janet Yellen develop the Fed’s policy on external communication. “There are a number of distinct details that suggest that Lacker wasn’t the main source of information.” Aaron Klein, a fellow at the Brookings Institution and the former chief economist on the Senate Banking Committee, said the Lacker statement “is not a full and complete accounting of what happened.” “The Fed, internally and its inspector general, would be wise to fully explore every aspect of what happened here because today’s actions and statements by Lacker raise more questions than they answer,” he said.
[..] Lacker’s carefully worded statement, distributed by his attorney, said he “crossed the line to confirming information that should have remained confidential.” The investigation into Lacker has concluded and no charges will be brought against him, the attorney said. He also said the Medley analyst “introduced into the conversation an important non-public detail” about one of the policy options under consideration. Lacker says he didn’t decline to comment “and the interview continued.” His statement doesn’t suggest that he tipped the Medley analyst initially. Indeed, the Fed board’s own investigation said “a few Federal Reserve personnel” had contact with the Medley analyst.
I once asked Janet Yellen a rather straightforward question that would echo for much longer than I expected. It was March 2015, and the Federal Reserve was under pressure from Congress to reveal details about an internal investigation into how key details of its interest rate policy deliberations had made their way into a report by a private sector firm. I was a reporter at the Wall Street Journal, and I asked the following at a press conference:
Let’s make something clear: Like any journalist, I love a good leak. But this was not your typical leak of important information to a journalist who then reported it to the public. This was the sharing of private, market-sensitive details with a private party – Medley Global Advisors – which then shared that information with its clients. The leak, it should be noted, happened all the way back in 2012 but it was still being discussed in 2015 because – despite the Fed’s internal investigation – nobody seemed to have gotten to the bottom of what had happened. And back in 2012, any read on what the Federal Reserve might do to suppress interest rates as the US economy continued to crawl out of the Great Recession, could lead to huge profits for the traders who bet on such things. These days, traders are thinking about the next rate hike.
Back then, interest rates were already at zero and the real insight gleaned from Medley’s report was how aggressively the Fed would work to keep them there by using its balance sheet. My question to Yellen had to do with basic public trust in the Fed. Why should the American people believe the central bank is working in its best interests if policymakers chat privately with movers and shakers on Wall Street? This was an alarming trend I had been reporting on since 2010, when I co-authored a report for Reuters entitled “Cozying up to big investors at Club Fed.” In it, my colleagues and I detailed other instances of market-moving information inappropriately being shared with investors, a trend we first observed when Fed officials speaking to bankers and hedge fund managers at conferences would suddenly go silent when a reporter walked by.
After the Yellen press conference, I took two weeks of paid leave for the birth of my daughter. When I returned, my editor at the paper told me I would no longer be attending Fed press conferences. No reason was given, and I left the job a few months later. Market bloggers speculated the Fed had “banned” me from the press conference. I have no reason to think that was the case because the central bank let me back in as soon as I changed news organizations. Fast-forward to April 4, 2017: Richmond Fed President Jeffrey Lacker resigns abruptly after admitting he was a source of the leak. As soon as I saw the news, the whole press conference incident flashed before my eyes. But Lacker’s admission that the Medley leak originated with him doesn’t entirely settle the matter. We know Yellen also met with Medley herself. Why? What did she say to them? Former Fed economist and Treasury official Seth Carpenter was also under scrutiny on the issue. What were the results of the Fed’s own investigation? And of Congress’?
Mr Russell told me there had been a big increase in debt-distressed Australians calling the [National Debt] helpline in recent months unable to pay their utilities bills. Naturally, he explained, rent and mortgage repayments take priority over the utilities bills because, in the order of survival priorities, you first need a roof over your head. Generally speaking, though, the National Debt helpline told me the rising cost of living is becoming crippling. Utilities bills, mortgage repayments and credit card debt, are all contributing to household financial stress. Last year over 150,000 calls were made to the National Debt Helpline. This year, monthly call volumes for the helpline are already 20% higher, compared to 2016. Based on current call volumes, the NDH predicts that there will be over 182,000 calls this year.
Martin North is the principal of financial research firm Digital Finance Analytics. He crunched the numbers and calculated that, in March, of the 3.1 million mortgaged households, around 22% were in “mild mortgage stress”. That’s up 1.5% on February, and is directly related to the even the smallest of interest rate increases by some of the big four banks. That means those households are managing to make their mortgage repayments, but only by cutting back on other expenditure, or putting more on credit cards, and generally hunkering down. Then there are those Australians under extreme levels of financial stress. Data from Digital Finance Analytics show 1% of households are in severe stress. That means they’re behind with their repayments, and are trying to dig their way out by refinancing, selling their property, or seeking help from services like the National Debt Helpline.
The rampant debt-fuelled surge in the Sydney and Melbourne property markets will threaten the health of the national economy if it continues, Reserve Bank governor Philip Lowe has warned. However, Treasurer Scott Morrison has talked down drastic action on house prices after a “strong intervention” from Dr Lowe. The RBA is worried that housing debts are rising more than twice as fast as household incomes and that banks are lending to people who cannot afford to repay their debts. The concern has been that the longer the recent trends continued, the greater the risk to the future health of the Australian economy, Dr Lowe told a business dinner in Melbourne last night. “Stretched balance sheets make for more volatility when things turn down.” “For many people, the high debt levels and low wage growth are a sobering combination.”
The chairman of the government’s Financial System Inquiry, former Future Fund chairman David Murray, yesterday sounded a further alarm on the housing boom, saying a crisis on the scale of the 1890s great property collapse could not be ruled out. “What people should do is look at the 1890s, which was caused by a housing land boom,” he told The Australian. “To say it won’t happen and simply ignore it is wrong.” Half of the nation’s banks closed their doors following the 1890s crash. “Many people say a crisis has a low probability of occurrence, but the problem with that view is that whatever the probability, the severity can be very high if it occurs”, Mr Murray, who is also a former Commonwealth Bank chief executive, said. “It shouldn t be allowed to grow & it’s too big a risk to take.”
[..] House prices in Australia’s capital cities have risen 12.9% compared with this time last year, with a surge of 18.9% in Sydney and 15.9% in Melbourne, according to data released on Monday by property analytics firm CoreLogic. [..] Dr Lowe dismissed fears that the banks would be undermined by a housing downturn, saying the Council of Financial Regulators did not believe the boom was a threat to financial stability. “Our banks are resilient and they are soundly capitalised,” he said.
China’s brokerages are out-muscling global investment banks to win more underwriting business in Asia’s junk bond market amid record offerings, as they increasingly help borrowers from the nation raise foreign currency debt. Haitong Securities topped the league table for high-yield notes denominated in dollars, euro and yen from companies in Asia excluding Japan in the first quarter, according to data compiled by Bloomberg. China Merchants Securities moved up four places to fifth. While HSBC rose three places to second, Standard Chartered and UBS slid to eighth and 11th from first and second in the first quarter of 2016. Junk bonds offer more lucrative fees than high-grade bonds, giving an extra boost to financial institutions that can expand in the business.
As Chinese firms have flocked to the offshore high-yield market, mainland banks and brokerage firms have grabbed market share away from international peers. Issuance of junk notes in dollars, euro and yen from Asia excluding Japan swelled to a record $14.6 billion in the first quarter, with nearly 70% from Chinese companies. “It’s increasingly competitive and Chinese banks are effectively buying market share with their balance sheet,” said Veronique Lafon-Vinais at the Hong Kong University of Science and Technology. Alexi Chan, global co-head of debt capital markets at HSBC, said that the significant rise in Asia high-yield bond sales reflected the “constructive market sentiment” and “positive outlook for China’s economy.”
Corporate Japan achieved a rare feat in the fiscal year that ended last week. Not one of its almost 4,000 publicly-traded firms filed for bankruptcy protection. Yet that’s no reason to celebrate, according to analysts who see Japan’s easy credit conditions standing in the way of a much-needed, corporate restructuring to flush out failing companies and make room for new businesses. “It’s totally unhealthy,” says Martin Schulz, an economist at Fujitsu Research Institute in Tokyo. “Japan’s business cycle isn’t working. When no old companies go out of business, no new ones can come in because there isn’t room. The old companies will always compete on price, simply because they can.”
The last time not a single Japanese corporate titan went belly up was a four-year stretch 26 years ago, according to a report published this week by research firm Teikoku Databank. Back then, though, an overheated Japanese economy averaged 5.5% growth per year and then hit a wall when stock and real estate asset bubbles burst. This time, ultra-low interest rates and government loan guarantees left over from the global financial crisis are keeping companies afloat. Prime Minister Shinzo Abe touts fewer business failures as an economic success, but critics say too-easy credit is keeping “zombie” firms alive, worsening labor shortages, and excess competition is putting downward pressure on prices.
The Austrian economist Joseph Schumpeter in 1942 coined the term “creative destruction” to describe the messy way that capitalism reinvents itself. Japan may be stuck in a rut because it refuses to take the economic pain needed for a revival. Yet it’s hardly the only country keeping companies on life support. A January study by the OECD blamed zombies – defined as firms with persistent difficulties paying interest on debt – for slowing productivity, and thus causing sluggish growth, in the developed world. In South Korea, where the shipping industry has been hit by slumping global trade, state-run banks last month agreed to lend Daewoo Shipbuilding $2.6 billion and swap debt for equity to prevent a default. It was the second time in less than two years that the troubled shipbuilder was bailed out.
In China, roughly 10% of the country’s publicly-traded companies are “among the walking dead,” being kept alive by continuous support from government and banks, according to research by He Fan, an economist at Beijing’s Renmin University. Banks keep lending, often because they don’t want to own up to their bad debts. Meanwhile, the government fears the unemployment that would result if so many troubled firms were left to wither away.
“..the owners of property along the subway line experience a rise in property values. They owe their increased wealth and their increased incomes from the rental values of their properties to the expenditure of taxpayer dollars. If these gains were taxed away, the subway line could have been financed without taxpayers’ money.”
If you want to learn real economics instead of neoliberal junk economics, read Michael Hudson’s books. What you will learn is that neoliberal economics is an apology for the rentier class and the large banks that have succeeded in financializing the economy, shifting consumer spending power from the purchase of goods and services that drive the real economy to the payment of interest and fees to banks. His latest book is J is for Junk Economics. It is written in the form of a dictionary, but the definitions give you the precise meaning of economic terms, the history of economic concepts, and describe the transformation of economics from classical economics, where the emphasis was on taxing incomes that are not the product of the production of goods and services, to neoliberal economics, which rests on the taxation of labor and production.
This is an important difference that is not easy to understand. Classical economists defined “unearned income” as “economic rent.” This is not the rent that you pay for your apartment. Economic rent is an income stream that has no counterpart in cost incurred by the receipient of the income stream. For example, when a public authority, say the city of Alexandria, Virginia, decides to connect Alexandria with Washington, D.C., and with itself, with a subway paid for with public money, the owners of property along the subway line experience a rise in property values. They owe their increased wealth and their increased incomes from the rental values of their properties to the expenditure of taxpayer dollars. If these gains were taxed away, the subway line could have been financed without taxpayers’ money.
It is these gains in value produced by the subway, or by a taxpayer-financed road across property, or by having beachfront property instead of property off the beach, or by having property on the sunny side of the street in a business area that are “economic rents.” Monopoly profits due to a unique positioning are also economic rents. Hudson adds to these rents the interest that governments pay to bondholders when governments can avoid the issuance of bonds by printing money instead of bonds. When governments allow private banks to create the money with which to purchase the government’s bonds, the governments create liabilities for taxpayers than are easily avoidable if, instead, government created the money themselves to finance their projects. The buildup of public debt is entirely unnecessary.
No less money is created by the banks that buy government bonds than would be created if the government printed money instead of bonds. The inability of neoliberal economics to differentiate income streams that are economic rents with no cost of production from produced output makes the National Income and Product Accounts, the main source of data on economic activity in the US, extremely misleading. The economy can be said to be growing because public debt-financed investment projects raise the rents along subway lines. “Free market” economists today are different from the classical free market economists. Classical economists, such as Adam Smith, understood a free market to be one in which taxation freed the economy from untaxed economic rents. In neoliberal economics, Hudson explains, “free market” means freedom for rent extraction free of government taxation and regulation. This is a huge difference.
New Zealand Post has announced its couriers will home-deliver KFC fast food, in a trial that could provide a recipe for success as letter volumes continue to dwindle. Under a pilot scheme that started this week in the North Island town of Tauranga, KFC customers can order online and have their food delivered by NZ Post drivers. KFC operator Restaurant Brands NZ said that while it knew how to produce food, it had no experience in logistics, making the postal service a natural fit. “NZ Post has an extensive delivery distribution network around New Zealand, and KFC is available in most towns nationwide,” chief executive Ian Letele said.
“With the support of NZ Post, we hope to service the home delivery needs of many more KFC customers throughout New Zealand.” New Zealand Post has struggled in the digital age as email and texts have replaced traditional “snail mail”. The state-owned service slashed 2,000 jobs, or 20% of its workforce in 2013, and two years later moved to three-day-a-week deliveries, down from six. It said in its last financial statement that the fall in letter deliveries meant it was losing up to NZ$30 million ($21 million) a year in revenue. However, it said parcel volumes were up due to rising online orders and NZ Post was concentrating on capturing more e-commerce business.
What’s going on in the US now is a culture clash. The people that live in the so-called “red counties” that voted for Trump—which is the vast majority of the geographical area of the US, flyover country—are aligned against the people that live in the blue counties, the coasts and big cities. They don’t just dislike each other and disagree on politics; they can no longer even have a conversation. They hate each other on a visceral gut level. They have totally different world views. It’s a culture clash. I’ve never seen anything like this in my lifetime.
There hasn’t been anything like this since the War Between the States, which shouldn’t be called “The Civil War,” because it wasn’t a civil war. A civil war is where two groups try to take over the same government. It was a war of secession, where one group simply tries to leave. We might have something like that again, hopefully nonviolent this time. I don’t think the US should any longer remain as one political entity. It should break up so that people with one cultural view can join that group and the others join other groups. National unity is an anachronism.
The Trump Trade could start looking more like a Trump Tantrum if the new U.S. administration’s healthcare bill stalls in Congress, prompting worries on Wall Street about tax cuts and other measures aimed at promoting economic growth. Investors are dialing back hopes that U.S. President Donald Trump will swiftly enact his agenda, with a Thursday vote on a healthcare bill a litmus test which could give stock investors another reason to sell. “If the vote doesn’t pass, or is postponed, it will cast a lot of doubt on the Trump trades,” said the influential bond investor Jeffrey Gundlach, chief executive at DoubleLine Capital. U.S. stocks rallied after the November presidential election, with the S&P 500 posting a string of record highs up to earlier this month, on bets that the pro-growth Trump agenda would be quickly pushed by a Republican Party with majorities in both chambers of Congress.
The S&P 500 ended slightly higher on Wednesday, the day before a floor vote on Trump’s healthcare proposal scheduled in the House of Representatives. On Tuesday, stocks had the biggest one-day drop since before Trump won the election, on concerns about opposition to the bill. Investors extrapolated that a stalling bill could mean uphill battles for other Trump proposals. Trump and Republican congressional leaders appeared to be losing the battle to get enough support to pass it. Any hint of further trouble for Trump’s agenda, especially his proposed tax cut, could precipitate a stock market correction, said Byron Wien, veteran investor and vice chairman of Blackstone Advisory Partners. “The fact that they are having trouble with (healthcare repeal) casts a shadow over the tax cut and the tax cut was supposed to be the principal fiscal stimulus for the improvement in real GDP,” Wien said. “Without that improvement in GDP, earnings aren’t going to be there and the market is vulnerable.”
In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond. The idea was revolutionary. The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors. The idea caught on, and pretty soon, everyone was doing it. As Bethany McLean and Joe Nocera describe in their excellent history of the financial crisis (All the Devils are Here), the first subprime bubble hit in the 1990s. Early subprime lenders like First Alliance Mortgage Company (FAMCO) had spent years making aggressive loans to people with bad credit, and eventually the consequences caught up with them. FAMCO declared bankruptcy in 2000, and many of its competitors went bust as well.
Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist. But it didn’t take very long for the madness to start again. By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned. Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny. It was madness. By 2007, the total value of these subprime loans hit a whopping $1.3 trillion. Remember that number. And of course, we know what happened the next year: the entire financial system came crashing down. Duh. It turned out that making $1.3 trillion worth of idiotic loans wasn’t such a good idea. By 2009, 50% of those subprime mortgages were “underwater”, meaning that borrowers owed more money on the mortgage than the home was worth.
In fact, delinquency rates for ALL mortgages across the country peaked at 11.5% in 2010, which only extended the crisis. But hey, at least that’s never going to happen again. Except… I was looking at some data the other day in a slightly different market: student loans. Over the last decade or so, there’s been an absolute explosion in student loans, growing from $260 billion in 2004 to $1.31 trillion last year. So, the total value of student loans in America today is LARGER than the total value of subprime loans at the peak of the financial bubble. And just like the subprime mortgages, many student loans are in default. According to the Fed’s most recent Household Debt and Credit Report, the student loan default rate is 11.2%, almost the same as the peak mortgage default rate in 2010. This is particularly interesting because student loans essentially have no collateral. Lenders make loans to students… but it’s not like the students have to pony up their iPhones as security.
Auto loan and lease credit performance will continue to deteriorate in 2017, led by the vulnerable subprime sector, Fitch Ratings said in a report released Wednesday. “Subprime credit losses are accelerating faster than the prime segment, and this trend is likely to continue as a result of looser underwriting standards by lenders in recent years,” said Michael Taiano, a director at the credit-ratings agency. Banks are starting to lose market share to captive auto finance companies and credit unions as they begin to tighten underwriting standards in response to deteriorating asset quality, Fitch said. According to the Federal Reserve’s January 2017 senior loan officer survey, 11.6% of respondents (net of those who eased) reported tightening standards, compared with the five-year average of 6.1%.
“This trend is consistent with comments made by several banks on earnings conference calls over the past couple of quarters,” Fitch said in the report. Fitch considers continued tightening by auto lenders as a credit-positive but it’s also paying attention to market nuances. The tightening, to date, primarily relates to pricing and loan-to-value (how much is still owed on the car compared to its resale value), but average loan terms continue to extend into the 72- to 84-month category. “The tightening of underwriting standards is likely a response to expected deterioration in used vehicle prices and the weaker credit performance experienced in the subprime segment,” added Taiano. Used-car price declines have accelerated more recently, which will likely pressure recovery values on defaulted loans and lease residuals, the analysts said.
The oil price has fallen back below the key $50 a barrel mark for the first time since November after surging US oil supplies dealt a blow to OPEC’s plan to erode the global oversupply of crude. The flagging oil price bounded above $50 a barrel late last year after a historic co-operation deal between OPEC and the world’s largest oil producers outside of the cartel to limit output for the first half of this year. The November deal was the first action taken by the group to limit supply for over eight years but since then the quicker than expected return of fracking rigs across the US has punctured the buoyant market sentiment of recent months. Brent crude prices peaked at $56 a barrel earlier this year and were still above $52 this week.
But by Wednesday the price fell to just above $50 a barrel and briefly broke below the important psychological level to $49.86 on Wednesday afternoon. Market analysts fear that a more sustained period below $50 could trigger a sell-off from hedge funds which would drive even greater losses in the market. The price plunge was sparked by the latest weekly US stockpile data which revealed a bigger than expected increase of 5 million barrels a day compared to a forecast rise of 1.8 million barrels. The flood of US shale emerged a day after Libya announced that would increase its output to take advantage of higher revenues from its oil exports. “The market is increasingly worried that the continued overhang of supply is not being brought down fast enough,” said Ole Hansen, a commodities analyst with SaxoBank.
During the so-called Chinese Banking Liquidity Crisis of 2013, the relative cost of funds for non-bank institutions spiked to 100bps. So, the fact that the ‘shadow banking’ liquidity premium has exploded to almost 250 points – by far a record – in the last few days should indicate just how stressed Chinese money markets are. While interbank borrowing rates have climbed across the board, the surge has been unusually steep for non-bank institutions, including securities companies and investment firms. They’re now paying what amounts to a record premium for short-term funds relative to large Chinese banks, according to data compiled by Bloomberg.
The premium is reflected in the gap between China’s seven-day repurchase rate fixing and the weighted average rate, which, by Bloomberg notes, widened to as much as 2.47 percentage points on Wednesday after some small lenders were said to miss payments in the interbank market. Non-bank borrowers tend to have a greater influence on the fixing, while large banks have more sway over the weighted average. “It’s more expensive and difficult for non-bank financial institutions to get funding in the market,” said Becky Liu at Standard Chartered. “Bigger lenders who have access to regulatory funding are not lending much of the money out.” Without access to deposits or central bank liquidity facilities, many of China’s non-bank institutions must rely on volatile money markets. As Bloomberg points out, The People’s Bank of China has been guiding those rates higher in recent months to encourage a reduction of leverage, while also stepping in at times to prevent a liquidity crunch.
China needs to take on its state-owned “zombie companies,” which keep borrowing even though they aren’t earning enough to repay loans or interest, says Nicholas Lardy of the Peterson Institute for International Economics. “That’s where the real problem is,” Lardy said Thursday in a Bloomberg Television interview from the Boao Forum for Asia, an annual conference on the southern Chinese island of Hainan. “It’s a component of the run-up in debt that they really have to focus on.” While flagging this concern, Lardy, a senior fellow at Peterson in Washington and author of “Markets Over Mao: The Rise of Private Business in China,” said anxiety over China’s debt growth is overstated. Household deposits will continue to underpin the banking and financial system, which means the situation with zombie firms is unlikely to reach a critical point.
Household savings are “very sticky, they’re not going anywhere, and the central bank can come in to the rescue if there are problems,” he said. Chinese corporate profits will probably continue to recover this year and after-tax earnings needed to service the debt load is improving, Lardy said. Another positive sign is a slowdown in the buildup of debt outstanding to non-financial companies. The combination of that slackening and companies’ increasing earning power “is improving the overall situation,” he said. When it comes to U.S. President Donald Trump’s negative rhetoric on China, the country’s leaders deserve “very high marks so far” for their cool reaction. “They’ve been waiting to see what Mr. Trump is actually going to do as opposed to what he’s talked about, so they haven’t overreacted,” he said. “They’ve made very careful preparations for the worst case if Trump does move in a very strong protectionist direction.”
China’s riskiest corporate borrowers are raising an unprecedented amount of debt overseas, leaving global investors to shoulder more credit risks after onshore defaults quadrupled in 2016. Junk-rated firms, most of which are property developers, have sold $6.1 billion of dollar bonds since Dec. 31, a record quarter, data compiled by Bloomberg show. In contrast, such borrowers have slashed fundraising at home as the central bank pushes up borrowing costs and regulators curb real estate financing. Onshore yuan note offerings by companies with local ratings of AA, considered junk in China, fell this quarter to the least since 2011 at 31.3 billion yuan ($4.54 billion). Global investors desperate for yield have lapped up offerings from China. Rates on dollar junk notes from the nation have dropped 81 basis points this year to 6.11%, near a record low, according to a Bank of America Merrill Lynch index.
Some investors have warned of froth. Goldman Sachs Group Inc. said last month that it sees little value in the country’s high-yield property bonds. Hedge fund Double Haven Capital (Hong Kong) has said it is betting against Chinese junk securities. “Today’s market valuations are tight and investors are focusing on yields without taking into account credit risks,” said Raja Mukherji at PIMCO. “That’s where I see a lot of risk, where investors are not differentiating on credit quality on a risk-adjusted basis.” Lower-rated issuers turning to dollar debt after scrapping financing at home include Shandong Yuhuang Chemical on China’s east coast. The chemical firm canceled a 500 million yuan local bond sale in January citing “insufficient demand.” It then issued $300 million of three-year bonds at 6.625% this week. Some developers have grown desperate for cash as regulators tighten housing curbs and restrict their domestic fundraising. That’s raising concern among international investors in China’s real estate sector who have been burned before.
A few hours after the New York market close on Feb. 1, an obscure Chicago artist by the name of Antonio Lee told the world he had become the world’s richest man. The 32-year-old painter said Google’s parent, Alphabet Inc., had bought his art company in exchange for a chunk of stock that made him wealthier than Bill Gates, Warren Buffett and Jeff Bezos – combined. Of course, none of it was true. Yet, on that day, Lee managed to issue his fabricated report in the most authoritative of places: The U.S. Securities and Exchange Commission’s Edgar database – the foundation of hundreds of billions of dollars in financial transactions each day. For more than three decades, the SEC has accepted online submissions of regulatory filings – basically, no questions asked.
As many as 800,000 forms are filed each year, or about 3,000 per weekday. But, in a little known vulnerability at the heart of American capitalism, the government doesn’t vet them, and rarely even takes down those known to be shams. “The SEC can’t stop them,” said Lawrence West, a former SEC associate enforcement director. “They can only punish the filer afterward and remove the filing from the system. So, caveat lector – let the reader beware.” Congress has already raised the alarm. For its part, the SEC, which declined to comment, has said those who make filings are responsible for their truthfulness and that only a handful have been reported as bogus. Submitting false information exposes the culprit to SEC civil-fraud charges, or even federal criminal prosecution.
On May 14, 2015, Nedko Nedev, a dual citizen of the United States and Bulgaria, filed an SEC form indicating he was making a tender offer – an outright purchase – for Avon, the cosmetics company. Avon’s shares jumped 20% before trading was halted, and the company denied the news. (A federal grand jury later indicted Nedev on market manipulation and other charges.) After the fraudulent Avon filing, U.S. Senator Chuck Grassley, the Iowa Republican and former chairman of the Finance Committee, told the SEC it must review its posting standards. “This pattern of fraudulent conduct is troubling, especially in light of the relative ease in which a fake posting can be made,” Grassley wrote in a letter to the agency. In response, Mary Jo White, who then chaired the SEC, said it wouldn’t be feasible to check information. She noted that there were on average 125 first-time filers daily in 2014, and the agency was studying whether its authentication process could be strengthened without delaying disclosure of key information to investors.
Since the U.S. economic recovery from the 2008 financial crisis, institutional economists began each subsequent year outlining their well-paid view of how things will transpire over the course of the coming 12-months. Like a broken record, they have continually over-estimated expectations for growth, inflation, consumer spending and capital expenditures. Their optimistic biases were based on the eventual success of the Federal Reserve’s (Fed) plan to restart the economy by encouraging the assumption of more debt by consumers and corporations alike. But in 2017, something important changed. For the first time since the financial crisis, there will be a new administration in power directing public policy, and the new regime could not be more different from the one that just departed. This is important because of the ubiquitous influence of politics.
The anxiety and uncertainties of those first few years following the worst recession since the Great Depression gradually gave way to an uncomfortable stability. The anxieties of losing jobs and homes subsided but yielded to the frustration of always remaining a step or two behind prosperity. While job prospects slowly improved, wages did not. Business did not boom as is normally the case within a few quarters of a recovery, and the cost of education and health care stole what little ground most Americans thought they were making. Politics was at work in ways with which many were pleased, but many more were not. If that were not the case, then Donald Trump probably would not be the 45th President of the United States. Within hours of Donald Trump’s victory, U.S. markets began to anticipate, for the first time since the financial crisis, an escape hatch out of financial repression and regulatory oppression.
As shown below, an element of economic and financial optimism that had been missing since at least 2008 began to re-emerge. What the Fed struggled to manufacture in eight years of extraordinary monetary policy actions, the election of Donald Trump accomplished quite literally overnight. Expectations for a dramatic change in public policy under a new administration radically improved sentiment. Whether or not these changes are durable will depend upon the economy’s ability to match expectations.
There is no other story in the world, no other show to watch. The first and most notable consequence of Trump’s administration is that his ability to generate celebrity has massively increased, his persona now turbocharged by the vast powers of the presidency. Trump has always been a reality star without peer, but now the most powerful man on Earth is prisoner to his talents as an attention-generation machine. Worse, he is leader of a society incapable of discouraging him. The numbers bear out that we are living through a severely amplified déjà vu of last year’s media-Trump codependent lunacies. TV-news viewership traditionally plummets after a presidential election, but under Trump, it’s soaring. Ratings since November for the major cable news networks are up an astonishing 50% in some cases, with CNN expecting to improve on its record 2016 to make a billion dollars – that’s billion with a “b” – in profits this year.
Even the long-suffering newspaper business is crawling off its deathbed, with The New York Times adding 132,000 subscribers in the first 18 days after the election. If Trump really hates the press, being the first person in decades to reverse the industry’s seemingly inexorable financial decline sure is a funny way of showing it. On the campaign trail, ballooning celebrity equaled victory. But as the country is finding out, fame and governance have nothing to do with one another. Trump! is bigger than ever. But the Trump presidency is fast withering on the vine in a bizarre, Dorian Gray-style inverse correlation. Which would be a problem for Trump, if he cared. But does he? During the election, Trump exploded every idea we ever had about how politics is supposed to work. The easiest marks in his con-artist conquest of the system were the people who kept trying to measure him according to conventional standards of candidate behavior.
You remember the Beltway priests who said no one could ever win the White House by insulting women, the disabled, veterans, Hispanics, “the blacks,” by using a Charlie Chan voice to talk about Asians, etc. Now he’s in office and we’re again facing the trap of conventional assumptions. Surely Trump wants to rule? It couldn’t be that the presidency is just a puppy Trump never intended to care for, could it? Toward the end of his CPAC speech, following a fusillade of anti-media tirades that will dominate the headlines for days, Trump, in an offhand voice, casually mentions what a chore the presidency can be. “I still don’t have my Cabinet approved,” he sighs. In truth, Trump does have much of his team approved. In the early days of his administration, while his Democratic opposition was still reeling from November’s defeat, Trump managed to stuff the top of his Cabinet with a jaw-dropping collection of perverts, tyrants and imbeciles, the likes of which Washington has never seen.
En route to taking this crucial first beachhead in his invasion of the capital, Trump did what he always does: stoked chaos, created hurricanes of misdirection, ignored rules and dared the system of checks and balances to stop him. By conventional standards, the system held up fairly well. But this is not a conventional president. He was a new kind of candidate and now is a new kind of leader: one who stumbles like a drunk up Capitol Hill, but manages even in defeat to continually pull the country in his direction, transforming not our laws but our consciousness, one shriveling brain cell at a time.
President Tayyip Erdogan said on Wednesday that Europeans would not be able to walk safely on the streets if they kept up their current attitude toward Turkey, his latest salvo in a row over campaigning by Turkish politicians in Europe. Turkey has been embroiled in a dispute with Germany and the Netherlands over campaign appearances by Turkish officials seeking to drum up support for an April 16 referendum that could boost Erdogan’s powers. Ankara has accused its European allies of using “Nazi methods” by banning Turkish ministers from addressing rallies in Europe over security concerns. The comments have led to a sharp deterioration in ties with the European Union, which Turkey still aspires to join.
“Turkey is not a country you can pull and push around, not a country whose citizens you can drag on the ground,” Erdogan said at an event for Turkish journalists in Ankara, in comments broadcast live on national television. “If Europe continues this way, no European in any part of the world can walk safely on the streets. Europe will be damaged by this. We, as Turkey, call on Europe to respect human rights and democracy,” he said. Germany’s Frank-Walter Steinmeier used his first speech as president on Wednesday to warn Erdogan that he risked destroying everything his country had achieved in recent years, and that he risked damaging diplomatic ties. “The way we look (at Turkey) is characterized by worry, that everything that has been built up over years and decades is collapsing,” Steinmeier said in his inaugural speech in the largely ceremonial role. He called for an end to the “unspeakable Nazi comparisons.”
As leaders celebrate the European Union’s 60th birthday in Rome this weekend, the host nation may be hoping that a pomp-filled ceremony distracts from any probing questions. Overshadowed by the sting of Brexit and elections in the Netherlands, France and Germany, Italy’s lingering problems have left it as the weak link among Europe’s powerhouse economies. It’s stumbling through a stop-start slow recovery from a record-long recession, unemployment is twice that of Germany’s, and voters, weary of EU institutions, are flirting with the same kind of populism grabbing attention elsewhere. The gathering on Saturday on the city’s Capitol hill is to celebrate the Treaty of Rome, the bedrock agreement signed on March 25, 1957 for what is now the EU.
From its beginnings as the European Economic Community – with Italy among the six founding members – it has since grown to a union of 28 nations stretching 4,000 kilometers from Ireland in the northwest to Cyprus in the southeast. The U.K. is heading toward a lengthy exit from the EU known as Brexit, raising questions among the remaining 27 about the bloc’s long-term future. “Italy was until very recently at the forefront of the European integration process,” Luigi Zingales, professor of finance at University of Chicago Booth School of Business, said in an interview. “Today it’s undoubtedly Europe’s weakest link.” The economy grew just 0.9% last year, below the euro area’s 1.7%, and unemployment is at 11.9%. A recent EU poll put Italy as the monetary union’s second-most euro-skeptic state after Cyprus with only 41% saying the single currency is “a good thing.” The average in the 19-member euro area is 56%.
That widespread disenchantment may be felt at elections due in about one year. A poll published on Tuesday by Corriere della Sera put support for the Five Star Movement, which calls for a referendum to ditch the euro, at a record 32.3%, well ahead of the ruling Democratic Party. Summit host Prime Minister Paolo Gentiloni has only been in power since December, when Matteo Renzi resigned after losing a constitutional reform referendum. For Zingales, Italy has problems that European policy makers “would rather not talk about now as they don’t want to scare people.” That’s because across the bloc, politicians are still fighting voter resentment over the loss of wealth since the financial crisis, bitterness about bailouts and anger over a perceived increase in inequality. “Sixty years after the signing of the Treaties of Rome, the risk of political paralysis in Europe has never been greater,” Bank of Italy Governor Ignazio Visco told a conference in Rome this month.
The year has started with some alarm bells regarding the course of consumer spending, generating concern not only about the impact on the supermarket sector and industry, but also on the economy in general. In the first week of March the year-on-year drop in supermarket turnover amounted to 15%, while in January the decline had come to 10%. Shrinking consumption is a sure sign that the economic contraction will be extended into another year, given its important role in the economy. The new indirect taxes on a number of commodities, the increased social security contributions, the persistently high unemployment and the ongoing uncertainty over the bailout review talks have hurt consumer confidence and eroded disposable incomes.
In this context, it will be exceptionally difficult to achieve the fiscal targets, especially if the uncertainty goes on or is ended with the imposition of additional austerity measures that would only see incomes shrink further. According to projections by IRI market researchers, supermarket sales in 2017 are expected to decline 3.6% from last year, with the worst-case scenario pointing to a 4.4% drop. Supermarket sales turnover dropped at the steepest rate seen in the crisis years in 2016, down 6.5%, after falling 2.1% in 2015, 1.4% in 2014, 3.5% in 2013 and 3.4% in 2012.
Greece has had nine different governments since 2009. At least thirteen austerity measures. Multiple bailouts. Severe capital controls. And a full-out debt restructuring in which creditors accepted a 50% loss. Yet despite all these measures GREECE IS STILL IN A DEBT CRISIS. Right now, in fact, Greece is careening towards another major chapter in its never-ending debt drama. Just like the United States, the Greek government is set to run out of money (yet again) in a few months and is in need of a fresh bailout from the IMF and EU. (The EU is code for “Germany”…) Without another bailout, Greece will go bust in July– this is basic arithmetic, not some wild theory. And this matters. If Greece defaults, everyone dumb enough to have loaned them money will take a BIG hit. This includes a multitude of banks across Germany, Austria, France, and the rest of Europe.
Many of those banks already have extremely low levels of capital and simply cannot afford a major loss. (Last year, for example, the IMF specifically singled out Germany’s Deutsche Bank as being the top contributor to systemic risk in the global financial system.) So a Greek default poses as major risk to a number of those banks. More importantly, due to the interconnectedness of the financial system, a Greek default poses a major risk to anyone with exposure to those banks. Think about it like this: if Greece defaults and Bank A goes down, then Bank A will no longer be able to meet its obligations to Bank B. Bank B will suffer a loss as well. A single event can set off a chain reaction, what’s called ‘contagion’ in finance. And it’s possible that Greece could be that event. This is what European officials have been so desperate to prevent for the last nine years, and why they’ve always come to the rescue with a bailout.
It has nothing to do with community or generosity. They’re hopelessly trying to prevent another 2008-style meltdown of the financial system. But their measures have limits. How much longer do Greek citizens accept being vassals of Germany, suffering through debilitating capital controls and austerity measures? How much longer do German taxpayers continue forking over their hard-earned wages to bail out Greek retirees? After all, they’ve spent nine years trying to ‘fix’ Greece, and the situation has only become worse. For a continent that has been at war with itself for 10 centuries and only managed to play nice for the last 30 or so years, it’s foolish to expect these bailouts to last forever. And whether it’s this July or some date in the future, Greece could end up being the catalyst which sets off a chain reaction on both sides of the Atlantic.
EU leaders are celebrating a year since they carved out the agreement with Turkey that stemmed the flood of refugees seeking to escape war and strife on Europe’s doorstep. But the importance of the agreement goes far beyond the fact that it has contributed to deterring refugees from coming to Greece. At the Norwegian Refugee Council, we fear that the system Europe is putting in place in Greece is slowly stripping people of their right to seek international protection. Greece took the positive step to enshrine in law some key checks and balances to protect the vulnerable – a victim of torture, a disabled person, an unaccompanied child – so they could have their asylum case heard on the Greek mainland rather than remaining on the islands.
But a European Commission action plan is putting Greece under pressure to change safeguards enshrined in Greek law. NRC, along with other human rights and humanitarian organizations, wrote an open letter to the Greek Parliament this month urging lawmakers to keep that protection for those most in need. Importantly, this is just another quiet example of how what is happening in Greece is setting precedents that may irrevocably change the 1951 Refugee Convention. Europe is testing things out in Greece. [..] It was Europe and its postwar crisis that led to the 1951 convention that protects those displaced by war. Now that convention risks expiring on the doorstep of the same continent that gave birth to it – Europe is in danger of becoming, as NRC’s Secretary-General Jan Egeland has said, the convention’s “burial agent.”
Very much in line with what I’ve been saying. China’s dollar reserves are plunging but its dollar-denominated debt soars. A devaluation looks inevitable, and it has to be big because having to do a second one is the worst of all worlds.
The Institute of International Finance reports that capital outflows swelled to a record $725 billion last year. China’s desperate to keep that capital at home to support the economy. And it’s been burning holes in its dollar reserves to support the yuan. Selling its dollar holdings to buy yuan puts footings under the yuan. Makes it more attractive. Halts the capital flight. But the fire can only burn so long before it torches the remaining reserves… A $2.99 trillion war chest or a $3 trillion war chest sounds like plenty. But as Jim Rickards explained recently, it’s not nearly as much as it sounds: “Of the $3 trillion that China has left, only $1 trillion of that is a liquid. One trillion is invested in hedge funds, private equity funds, gold mines, et cetera. That money is not liquid. It cannot be used to support the currency, so remove a trillion.”
That leaves $2 trillion: “Another trillion has to be held on what’s called a precautionary reserve to bail out their banking system. The Chinese banks are completely insolvent. That system is going to need to be bailed out sooner rather than later.” Scratch another trillion: “That leaves only $1 trillion of the original $4 trillion in liquid form. The problem is that capital flight is continuing at a rate of $1 trillion per year, so China will be devoid of usable liquid assets by late 2017.” So now what? Jim has warned that Trump could soon label China a currency manipulator. That has vast implications, as you’ll see. But it’s not just Mr. Rickards. We learn today that a group of analysts at Deutsche Bank is piping an identical tune:
“Sometime in the next few weeks, President Trump or his Treasury secretary may declare China a currency manipulator and propose penalties including tariffs on some or all imports from China unless it ceases this and other alleged unfair trade policies.” And that would invite Chinese retaliation. Tariffs of their own on American goods. And then… China might reach for the nuclear option — a “maxi-devaluation.” Jim again: “We know what Donald Trump has said. China’s going to be labeled a currency manipulator. That’s like firing the first shot in a major currency war. We could see tariffs imposed in both directions, shots in retaliation, a financial war… China will retaliate with what I call their nuclear option, which is a maxi-devaluation of the Chinese yuan.”
If China’s going to be branded a currency manipulator and have its exports slapped with a steep tariff, why not go ahead and devalue? One, it would make Chinese exports more competitive. Two, China could stop depleting its dollar reserves. It would no longer have to burn through dollars to boost the yuan. And three, it could actually halt the capital outflows. How? Many Chinese fear the government will impose stricter capital controls as the situation worsens. So they move their capital out of the country in advance. That brings greater fear of capital controls. And more incentives for capital flight. It’s a vicious cycle. But if China devalues all at once, say, 25% or 30%, it sends this message: The worst is over. You may as well keep your capital in China. There will be no further devaluation.
Germany posted a record trade surplus in 2016, which may further fuel accusations by the Trump administration that Europe’s largest economy is exploiting a “grossly undervalued” euro. Exports climbed 1.2% last year to 1.2 trillion euros ($1.3 trillion), the Federal Statistics Office in Wiesbaden reported on Thursday, while imports rose 0.6% to 954.6 billion euros. That left Germany’s trade surplus at 253 billion euros in 2016. The report feeds into a debate kicked off late last month by Peter Navarro, the head of the White House National Trade Council, who told the Financial Times that Germany is gaining an unfair advantage over the U.S. and other nations with a weak currency.
ECB President Mario Draghi, Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble all rejected the claim that came on the back of President Donald Trump’s promises of renegotiating or tearing up free-trade treaties. “The fact that the German economy is exporting much more than it imports is a source of concern and no reason to be proud” because weak imports are the result of a lack of investment, Marcel Fratzscher, head of the DIW economic institute in Berlin, said in an e-mailed statement. “The record surplus will continue to fuel conflict with the U.S. and within the EU.” Exports fell 3.3% in December from the previous month, the report said, while imports were unchanged. The country’s current-account surplus reached 266 billion euros in 2016.
The carnage continues in the U.S. major oil industry as they sink further and further in the RED. The top three U.S. oil companies, whose profits were once the envy of the energy sector, are now forced to borrow money to pay dividends or capital expenditures. The financial situation at ExxonMobil, Chevron and ConocoPhillips has become so dreadful, their total long-term debt surged 25% in just the past year. [..] While the Federal Government could step in and bail out BIG OIL with printed money, they cannot print barrels of oil. Watch closely as the Thermodynamic Oil Collapse will start to pick up speed over the next five years. According to the most recently released financial reports, the top three U.S. oil companies combined net income was the worst ever. The results can be seen in the chart below:
In 2011, ExxonMobil, Chevron and Conocophillips enjoyed a combined $80.4 billion in net income profits. ExxonMobil recorded the highest net income of the group by posting a $41.1 billion gain, followed by Chevron at $26.9 billion, while ConocoPhillips came in third at $12.4 billion. However, the rapidly falling oil price, since the latter part of 2014, totally gutted the profits at these top oil producers. In just five short years, ExxonMobil’s net income declined to $7.8 billion, Chevron reported its first $460 million loss while ConocoPhillips shaved another $3.6 billion off its bottom line in 2016. Thus, the combined net income of these three oil companies in 2016 totaled $3.7 billion versus $80.4 billion in 2011. Even though these three oil companies posted a combined net income profit of $3.7 billion last year, their financial situation is much worse when we dig a little deeper.
We must remember, net income does not include capital expenditures or dividend payouts. If we look at these oil companies Free Cash Flow, they have been losing money for the past two years. Their combined free cash flow fell from a healthy $46.3 billion in 2011 to a negative $8.7 billion in 2015 and a negative $7.3 billion in 2016. Now, their free cash flow would have been much worse in 2016 if theses companies didn’t reduce their CAPEX spending by nearly a whopping $20 billion.
[..] the free cash flow minus dividend payouts provides us evidence that these oil companies have been seriously in the RED since 2013, not just the past two years displayed in the Free Cash Flow chart. As we can see, the group’s free cash flow minus dividends was a negative $32.8 billion in 2015 and a negative $29 billion last year. Of course, these three companies may have sold some financial investments or assets to reduce these negative values, but a company can’t stay in business for long by selling assets that it would need to use to produce oil in the future. So, what has falling free cash flow and dividends done to ExxonMobil, Chevron and ConocoPhillips long-term debt? You guessed it… it skyrocketed:
More than $1 trillion of junk-rated corporate debt is slated to mature over the next five years, creating a stiff challenge for heavily-indebted businesses if the market for riskier debt were to deteriorate, according to a new report from Moody’s Investors Service. The $1.063 trillion in maturing debt is the highest ever recorded by the ratings firm over a five-year period and also includes the highest single-year volume in 2021, when $402 billion of junk-rated corporate debt is scheduled to come due. Overall, a little more than $2 trillion of corporate debt is scheduled to mature by 2021 when factoring in $944 billion of investment-grade bonds. But it is the volume of junk-rated debt that could be of greater significance, given that investment-grade companies rarely have trouble extending debt maturities even in more difficult conditions.
As it stands, the environment remains highly favorable for junk-rated businesses, making it easy for most to access funds at their choosing. The average junk-bond yield was 5.72% Tuesday, the lowest level since September 2014. Buoyed by rising interest rates, junk-rated bank loans, which feature floating-rate coupons, have performed especially well of late, enabling U.S. companies to refinance $100 billion of loans in January, the largest monthly total in at least a decade, according to data from S&P Global Still, conditions can change quickly in the leveraged finance markets. A year ago, amid concerns that the U.S. was heading toward another recession, the average junk bond yield was nearly 10%, raising the risk that many borrowers would be unable to refinance bonds with looming maturities, hastening their descent into bankruptcy.
Donald Trump’s administration has put itself on a fresh collision course with the European Union after the president’s candidate to be ambassador in Brussels said Greece should leave the euro and predicted the single currency would not survive more than 18 months in its present form. Days after being accused of “outrageous malevolence” towards the EU for publicly declaring that it “needs a little taming”, Ted Malloch courted fresh controversy by saying Greece should have left the eurozone four years ago when it would have been “easier and simpler”. Malloch made his comments as financial markets began to take fright at the possibility of a fresh Greek debt crisis later this year. Shares fell and interest rates on Greek debt rose after it emerged that the EU was at loggerheads with the IMF over whether to give the country more generous debt relief.
“Whether the eurozone survives I think is very much a question that is on the agenda,” he told Greek Skai TV’s late-night chat show Istories. “We have had the exit of the UK, there are elections in other European countries, so I think it is something that will be determined over the course of the next year, year and a half. “Why is Greece again on the brink? It seems like a deja vu. Will it ever end? I think this time I would have to say that the odds are higher that Greece itself will break out of the euro,” Malloch said. The stridently Brexit-supporting businessman, who has yet to be confirmed as the US president’s EU ambassador and is seen by Brussels as a provocative nominee for the post, said he wholeheartedly agreed with Trump’s tweet from 2012 saying Greece should return to the drachma, its former currency.
“I personally think [Trump] was right. I would also say that this probably should have been instigated four years ago, and probably it would have been easier or simpler to do,” Malloch said in the interview with the show’s chief anchor, Alexis Papahelas. Seven years of arduous austerity – the price of the international bailout – had been so bad for the country that it was questionable whether what came next could possibly be worse, Malloch said. In the third bailout in as many years, Greece has lost more than 25% of its GDP due to austerity-fuelled recession, the biggest slump of any advanced western economy in modern times. Without further emergency funding from its €86bn rescue programme, Athens could face a default in July when debt repayments of about €7bn to the European Central Bank mature.
[..] The renewed focus came as the IMF revealed its board was split over how far spending cuts in the country should go, raising fresh doubts over the IMF’s participation in rescue plans for the struggling Greek economy. The IMF believes that the budgetary demands being imposed on Greece by Europe are unreasonable and that the country’s debts will hit 275% of national income by 2060 without fresh assistance. Malloch said: “I have travelled to Greece, met lots of Greek people, I have academic friends in Greece and they say that these austerity plans are really deeply hurting the Greek people, and that the situation is simply unsustainable. So you might have to ask the question if what comes next could possibly be worse than what’s happening now.” The biggest unknown was not a euro exit, but the chaos it would likely engender as Greece moved to a new currency, he said.
French revolution. Ironic that the central bank governor makes Le Pen’s point while trying to ‘push back’: “The Bank of France belongs to all French and is at the service of a French asset – our currency.” That’s exactly Le Pen’s point, it’s just that she doesn’t see the euro as ‘our currency’. For her, that means the franc.
Presidential candidate Marine Le Pen’s chief economic adviser Bernard Monot met with Bank of France Governor Francois Villeroy de Galhau in September and set out her party’s plans to take control of the central bank and use it to finance government spending. The meeting took place on the sidelines of Villeroy de Galhau’s public hearing in Brussels at the economic and monetary committee of the European Parliament, Monot, who also sits on the panel, said in a Feb. 4 interview. The central bank has become one of Le Pen’s key targets as she fleshes out her plans for taking control of the French economy and leaving the euro. She intends to revoke the Bank of France’s independence and use it to finance French welfare payments and service the government’s debts after abandoning the European monetary union.
While the National Front leader is ahead in polling for the first ballot on April 23, she’s still an outsider to become the next president because of the two-round system which requires broad-based support to win the run-off two weeks later. Villeroy de Galhau, who also sits on the governing council of the ECB, pushed back against her proposals in an interview on BFM television Thursday, though he didn’t mention her specifically. “It’s important that we have institutions and a currency that straddle daily turbulence,” the governor said. “The Bank of France belongs to all French and is at the service of a French asset – our currency.” The spread between French 10-year bonds and similarly dated German debt was the widest in more than four years earlier this week, as political uncertainty deterred investors. Villeroy de Galhau described the move as “temporary tension.”
The British economy will be healthier when its dependence on banking goes down. Not richer, but healthier. For instance, home prices can finally fall, a much needed development. There’s nothing good about a one-trick pony.
Global banks in London may have to relocate 1.8 trillion euros ($1.9 trillion) of assets to the continent after Britain withdraws from the European Union, putting as many as 30,000 U.K. jobs at risk, according to Brussels-based research group Bruegel. The assets potentially on the move represent 17% of the U.K. banking system, Bruegel said in a report published Wednesday. Based on discussions with market participants, the researchers estimate that 35% of wholesale banking activity in London can be attributed to dealings with customers inside the EU. Financial firms will have to move that business to countries inside the trading bloc after the U.K. leaves the EU in 2019, likely spelling the end of passporting, where firms seamlessly service the rest of the single market from their London hubs.
Banks, and their clients, are most concerned about a “cliff edge” Brexit, whereby all access is cut off after two years. To safeguard against that loss of access, banks are already in discussions with European regulators about setting up new bases inside the EU and have said they will start the process of moving people within weeks of the government triggering Brexit talks, expected in March. “At a minimum, it is expected that the new EU27-based entities will need to have autonomous boards, full senior management teams, senior account managers and traders, even though much of the back-office might stay in London or elsewhere in the world,” researchers led by Andre Sapir said in the report.
London-based firms will likely have to move about 10,000 employees into these new EU entities, Breugel estimates. An additional 18,000 to 20,000 people in associated professions, such as lawyers, consultants and accountants, may also have to relocate. Bruegel’s estimates are at the conservative end of the spectrum. TheCityUK industry lobby group forecasts as many as 35,000 banking jobs could be relocated, rising to 70,000 when including associated financial services. London Stock Exchange CEO Xavier Rolet has said Brexit would likely see 232,000 jobs leaving the U.K.
The Federal Reserve is dominated by academics who don’t know how finance and the economy really work, according to a former Federal Reserve Bank of Dallas staffer in her new book. Danielle DiMartino Booth, an adviser to Richard Fisher when he was Dallas Fed president, says the economists who control most of the central bank’s seats of power filter their decision-making through theoretical models. That led the institution to miss the forces that created the financial crisis, and then adopt the wrong policies to put the economy back on track, she says. Ms. Booth makes her case in a book called “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” set to be published Tuesday. Her book comes as other Fed critics are pushing for more diversity at the central bank.
They often focus on the dearth of women and minorities among the top officials, but some have said a broader range of educational and professional backgrounds also would widen the central bank’s perspective. Of the 17 Fed governors and regional bank presidents, 16 are white, 13 are men, and 10 have a Ph.D. in economics. Ms. Booth’s arguments echo those of her former boss, who led the Dallas Fed from 2005 to 2015, and frequently voted against the central bank’s aggressive stimulus efforts during and after the financial crisis. “If you rely entirely on theory, you are not going to conduct the right policy, because policies have consequences” that in many cases people with real-world experience are particularly well-suited to spot, Mr. Fisher said in an interview late last year.
Mr. Fisher hired Ms. Booth, a former Wall Street trader turned financial journalist, to work at the Dallas Fed in 2006 on the strength of columns she had written warning about the state of the housing market and financial markets. She eventually rose to be his appointed eyes and ears on financial markets. In her book, Ms. Booth describes a tribe of slow-moving Fed economists who dismiss those without high-level academic credentials. She counts Fed Chairwoman Janet Yellen and former Fed leader Ben Bernanke among them. The Fed’s “modus operandi” is defined by “hubris and myopia,” Ms. Booth writes in an advance copy of the book. “Central bankers have invited politicians to abdicate leadership authority to an inbred society of PhD academics who are infected to their core with groupthink, or as I prefer to think of it: ‘groupstink.’”
“Global systemic risk has been exponentially amplified by the Fed’s actions,” Ms. Booth writes, referring to the central bank’s policies holding interest rates very low since late 2008. “Who will pay when this credit bubble bursts? The poor and middle class, not the elites.” Fed officials have defended their crisis-era stimulus policies, saying they lowered unemployment and helped the housing market recover. Opponents feared near-zero interest rates would cause excessive inflation and dangerous market bubbles, neither of which has happened. Ms. Booth also is among the Fed critics who see a worrisome revolving door between the central bank and the financial firms it regulates. She points to New York Fed President William Dudley, a former Goldman Sachs chief economist, as an illustration of a “codependent” relationship between the central bank and markets. He and three other regional Fed bank presidents have worked for or had associations with Goldman Sachs. With this in mind, she writes, “Goldman has positioned players on the Fed’s chessboard.”
When the Italian central bank’s deputy governor joined a radio phone-in show last week, many callers asked why Italy didn’t ditch the euro and return to its old lira currency. A few years ago such a scenario, that Salvatore Rossi said would lead to “catastrophe and disaster”, would not have been up for public discussion. Now, with the possibility of an election by June, politicians of all stripes are tapping into growing hostility towards the euro. Many Italians hold the single currency responsible for economic decline since its launch in 1999. “We lived much better before the euro,” says Luca Fioravanti, a 32-year-old real estate surveyor from Rome. “Prices have gone up but our salaries have stayed the same, we need to get out and go back to our own sovereign currency.”
The central bank is concerned about the rise in anti-euro sentiment, and a Bank of Italy source told Reuters Rossi’s appearance is part of a plan to reach out to ordinary Italians. Few Italians want to leave the European Union, as Britain chose to do in its referendum last year. Italy was a founding EU member in 1957 and Italians think it has helped maintain peace and stability in Europe. And the ruling Democratic Party (PD) is pro-euro and wants more European integration though it complains that the fiscal rules governing the euro are too rigid. But the three other largest parties are hostile, in various degrees, to Italy’s membership of the single currency in its current form. The PD is due to govern until early 2018, unless elections are called sooner. The PD’s prospects of victory have waned since its leader Matteo Renzi resigned as premier in December after losing a referendum on constitutional reform, and polls suggest that under the current electoral system no party or coalition is likely to win a majority.
Italians used to be among the euro’s biggest supporters but a Eurobarometer survey published in December by the European Commission showed only 41% said the euro was “a good thing”, while 47% called it “a bad thing.” In the Eurobarometer published in April 2002, a few months after the introduction of euro notes and coins, Italy was the second most pro-euro nation after Luxembourg, with 79% expressing a positive opinion. Italy is the only country in the euro zone where per capita output has actually fallen since it joined the euro, according to Eurostat data. Its economy is still 7% smaller than it was before the 2008 financial crisis, and youth unemployment stands at 40%.
The head of Italy’s bank-bailout fund said on Tuesday the country lacked a clear strategy for shifting 356 billion euros ($381 billion) in problem loans. In an extraordinary outburst from a man picked by Rome to help tackle the problem, Alessandro Penati, whose boutique asset management firm was chosen to raise private funds for struggling banks, said he felt “bitter and disillusioned”. His comments exposed tensions within the banking sector over Italy’s rescue efforts. “There is no clear vision of the problem and no strategy,” Penati said at a financial conference in Milan, suggesting that he was virtually working alone on rescues that had revealed “horror stories” within some banks. “There is simply a reaction to a problem and this has been the main difficulty for me over these past few months – I had nobody to relate to.”
The Atlante fund, created 10 months ago following pressure from the government, gathered 4.25 billion euros from around 70 mostly private investors, including Italy’s healthier lenders, to buy up bad loans and invest in weaker banks. But the fund’s investors are already making big writedowns on the value of their stakes in Atlante, which promised them annual returns of 6%. The fund faces ever greater demands for capital and no investors willing to stump up more money. In December, Penati’s plan to buy into Italy’s biggest-ever sale of bad debts – 28 billion euros worth of loans written by struggling bank Monte dei Paschi di Siena (BMPS.MI) — fell apart when the bank failed to find any other major investors.
Penati, a former economist who set up Milan-based Quaestio Capital Management, said the sale had collapsed because it had been tied to a capital raising that had been “badly devised and even more badly executed”. Monte dei Paschi (MPS) is now to be rescued by the state. “It would no longer make sense for Atlante to play a role now. The point is that state intervention is considered a way to solve all problems, but it isn’t … MPS’s bad loan problem remains and how they are going to solve it – I don’t know.”
On Tuesday the Army Corps of Engineers gave notice to Congress that within 24 hours it would grant an easement allowing Energy Transfer Partners to move forward with construction on the Dakota Access Pipeline, which North Dakota’s Standing Rock Sioux tribe and thousands of allies have attempted to halt out of concern for water contamination, dangers to the climate, and damage to sites of religious significance to the tribe. The federal government dismissed those concerns in its filing. “I have determined that there is no cause for completing any additional environmental analysis,” Douglas Lamont, the acting assistant secretary of the Army, wrote in a memorandum. “The COE has full responsibility to take the reasonable steps necessary to execute the requested easement.”
Two weeks earlier, after only four days in office, Trump signed two memoranda instructing federal officials to ram forward approvals for the Dakota Access and Keystone XL pipelines, both of which had been halted by the Obama administration after people mobilized across the U.S. to stop them. On Dakota Access, the Army Corps did just what the president demanded, waiving the standard 14-day waiting period before such a permit becomes official. The tribe has been left with just one day to rally a legal response. Lawyers for the tribe say they will argue in court that an environmental impact statement, mandated by the Army Corps under Obama, was wrongfully terminated. They will likely request a restraining order while the legal battle ensues. Pipeline company lawyers have said that it would take at minimum 83 days for oil to flow from the date that an easement is granted.
Although the tribal government once supported the string of anti-pipeline camps that began popping up last spring, leaders have since insisted that pipeline opponents go home and stay away from the reservation. “Please respect our people and do not come to Standing Rock and instead exercise your First Amendment rights and take this fight to your respective state capitols, to your members of Congress, and to Washington, D.C.,” tribal chairman Dave Archambault said in a statement. Still, the easement announcement is already activating pipeline opponents to return. A “couple thousand people” are headed back to the camps, including contingents of veterans, said former congressional candidate Chase Iron Eyes, a member of the tribe, in a video posted to Facebook.
Hours before the final vote on the triggering of Article 50 the government quietly announced it would allow just 350 unaccompanied Syrian children to come to the UK, thousands short of the figure suggested by government sources last year. The statement from Immigration Minister Robert Goodwill said local authorities indicated “have capacity for around 400 unaccompanied asylum-seeking children until the end of this financial year” and said the country should be “proud” of its contribution to finding homes for refugees. Liberal Democrat leader Tim Farron called the decision “a betrayal of British values”. “Last May, MPs from all parties condemned the Government’s inaction on child refugees in Europe, and voted overwhelmingly to offer help to the thousands of unaccompanied kids who were stranded without their families backed by huge public support,” Mr Farron said.
“Instead, the Government has done the bare minimum, helping only a tiny number of youngsters and appearing to end the programme while thousands still suffer. At the end of December last year the Government had failed to bring a single child refugee to the UK under the Dubs scheme from Greece or Italy where many of these children are trapped.” Ministers introduced the programme last year after coming under intense pressure to give sanctuary to lone children stranded on the continent. Calls for the measure were spearheaded by Lord Dubs, whose amendment to the Immigration Act requires the Government to “make arrangements to relocate to the UK and support a specified number of unaccompanied refugee children from other countries in Europe”.
I am the aunt of Alan Kurdi, the Syrian boy who tragically drowned September 2, 2015. The devastating image of my 2-year old nephew’s lifeless body, lying face-down on the beach in Turkey, was all over the news across the world. Two weeks ago, I got home from work and my husband showed me a video of Tulsi Gabbard talking about her visit to my home country of Syria. The things she was saying about the United States policy of regime change and how the West and the Gulf countries are funding the rebel groups who wind up with the terrorists are true. I was shocked because it’s something no other U.S. politician has the courage to say. Regime change policy has destroyed my country and forced my people to flee. Tulsi’s message was exactly what I have been trying to say for years, but no one wants to listen.
I live in Canada now, but I was born and raised in Damascus, Syria. Growing up, our country was peaceful, beautiful and safe. Our neighbors were Christian, Muslim, Sunni, Shia; all kinds of religion and color. We all lived together and respected each other. Syria is a secular country. In 2011, the war started in Syria. Most of my family was still in Damascus. I was always in close contact with them and talked to them on the phone on a daily basis. For a year, I heard many tragic stories of people, friends, and neighbors who I grew up with having died in this war. Ultimately, my family had to flee to Turkey. I did what everyone would do for their own family to help, I sent them money and I listened to their struggles to survive as refugees in Turkey.
In 2014, I went to Turkey to visit my family and tried to help them. What I saw and experienced is not what we all saw in the news or we heard in the radio. It was worse than I could ever have imagined. I saw people in the streets without homes, without hope. Children were hungry, begging for a piece of bread. I heard many heartbreaking stories from other refugees who were suffering so much and many who had lost loved ones in the war. After I returned to Canada, I decided I wanted to bring my family here as refugees, but I couldn’t get them approved to come in. Eventually, my brother Abdullah and his wife Rehana, like thousands of Syrians, decided they had to take the risk and trust a smuggler they thought would bring them to freedom, safety, and hope. In September 2, 2015, I heard the tragic news that my sister-in-law Rehana and her two sons drowned crossing from Turkey to Greece.
The image of my two year old nephew Alan Kurdi lying face down on a Turkish beach was all over the media across the world. It was the wake up call to the world. Enough suffering. Enough killing. And most importantly, it was my wake up call. [..] Like me, many Syrians are encouraged that Tulsi met with President Bashar Assad in Syria. Tulsi recognizes that we need to talk to him because a political solution is the only way to restore peace in Syria. If the West keeps funding the rebels, we will see more people flee, more bloodshed, and more suffering. My people have suffered for at least six years. This is not about supporting Bashar. This is about ending the war in Syria. We can’t continue like this, supporting regime change. We have seen it before in Iraq, in Libya, and look what happened to them.
The chart below emphasizes the point that real business investment has declined while commercial and industrial loans are increasing. The leverage in the system is the highest ever as cheap money is not going to the right places. Businesses will only invest in new initiatives if they see sales growth in the future. Low interest rates will not cause a manager to invest in a new initiative. However, managers are still tempted to take the free money, so they pile it into the easiest place: dividends and buybacks.
As you can see, the total payout ratio of dividends and buybacks has exceeded 100% for the past two years. Usually, this borrowing to fund buybacks and dividends doesn’t last this long and it has never lasted three years, so leverage is near its brink.
The chart below shows how levered the balance sheets of corporations are. The leverage on investment-grade balance sheets is at a record high. The three bubbles that you can see in the chart below have all been created by the Federal Reserve’s easy money policies.
The European Central Bank is starting to price itself out of the corporate-bond market as yields plumb such lows that some notes are no longer eligible for its purchase program. ECB President Mario Draghi’s unprecedented buying of corporate debt has sent borrowing costs tumbling to a record and now yields on some securities are so low they fall outside the ECB’s own criteria. Yields on bonds from Paris’s public transport network have already dropped below the threshold of minus 0.4%, while those from Siemens, Europe’s biggest engineering company, France’s train operator SNCF and Sagess, which manages the nation’s strategic oil reserves, are also approaching the cut-off point.
The increasingly negative yields are raising questions about how much more the ECB can do in credit markets to stimulate growth. Yields on €2.6 trillion ($2.9 trillion) of government bonds in Europe have already turned negative after the central bank bought €1.3 trillion of fixed-income assets, including €32 billion of corporate bonds. “This is a sign of how much impact corporate bond buying has had on the credit market,” said Barnaby Martin at Bank of America. “If corporate yields continue to fall, then conceivably it could impact the ECB’s ability to buy bonds. It’s surprising how quickly we’ve reached this situation.”
Once enough people are priced out of the housing market, demand collapses. This would normally be where housing bubbles deflate in a very painful manner for lenders, homeowners, and everyone getting their cut, including governments and the real estate industry. But there has been a strong influx of mostly Chinese investors that need to get their money, however they obtained it, out of harm’s way at home, and they pile into the market, and they don’t care what a property costs as long as they think they can sell it for more later. But British Columbia threw a monkey wrench in to the calculus this summer when it adopted a 15% real estate transfer tax and other measures aimed squarely at non-resident investors. It hit home, so to speak.
Total sales in Vancouver plunged 32.5% in September from a year ago, with sales of detached homes falling off a cliff – down 47%. Home sales have fallen every month since their all-time crazy peak in February on a seasonally adjusted basis, for a cumulative decline of 44%, according to Marc Pinsonneault, Senior Economist at Economics and Strategy at the National Bank of Canada. But home prices have not yet fallen, he wrote in the note, “because market conditions have just started to loosen from the tightest conditions on records. We see home price deflation starting soon (10% expected over twelve months).” His chart shows the plunge in sales (red line, left scale, in thousands of units) even as active listings have started to rise (blue line, right scale):
In Toronto, the opposite is happening, with sales spiking on a seasonally adjusted basis way past prior record levels, even as new listings have plunged.
For now, “Toronto is now the red hot market,” explains Pinsonneault: “Home sales broke records in each of the last three months. But the historically low supply (in terms of the number of homes listed for sale) is also contributing to market conditions that are the tightest on records.” But the situation can turn on a dime, as Vancouver demonstrated. When a bubble pops, the first thing that stops is transactions. This happens suddenly. Sellers refuse to cut their prices, while buyers refuse to step up to the plate. Things grind to a halt.
Once sellers are forced to relent on price, transactions start rolling again, at lower prices, and each lower price, due to the metrics of comparable sales, pressures down future prices of other transactions. Once Chinese investors figure out that they’re likely to lose a ton of money in Canadian real estate, because their compatriots who’ve piled into the market before them have already lost a ton of money, they’re going to lose their appetite. This is the hot money. It evaporates suddenly and without a trace. As Vancouver shows, bubbles don’t end in a plateau.
It’s becoming difficult to see how the lowest-rated U.S. junk bonds can continue to rally. They’ve posted their best performance since 2009, with more than a 30% return so far this year. And now investors from Goldman Sachs Asset Management to Highland Capital are starting to become nervous about this debt, and with good reason: If there’s any sort of economic shock at all, these notes are poised to lose a lot. And some sort of shock is entirely possible in the near future. These notes have benefited from two overwhelming factors this year:
1) New stimulus efforts in Japan and Europe have pushed investors into the most-speculative notes, especially those in the U.S.
2) Oil prices have rallied from the lows reached earlier this year, giving some highly indebted energy companies more time to survive after seeing their corporate lives flash before their eyes last year.There are signs that both dynamics are reaching their limits.Central bankers in Europe and Japan are running out of ways to stimulate their economies after deploying negative-rate policies that are eroding the stability of their financial systems. Instead of trying to add stimulus, policy makers in both regions are being forced to tweak existing bond-buying programs to keep them viable. And oil prices have rallied, but not as much as energy junk bonds, which have gained more than 49% since the end of February. This has propelled gains on the broader high-yield market.
[..] current prices aren’t high enough to sustain the current momentum in these bonds. That’s because a “significant amount” of the lowest-rated unsecured bonds of energy companies are pricing in oil at $70 a barrel over the longer term, Jefferies analyst Michael Carley said. Taking a step back, why should the lowest, most-leveraged junk bonds continue to do well? This debt should do best when an economy is steadily growing, interest rates are low and companies have bright futures. But U.S. companies are facing an earnings recession, the Federal Reserve is poised to raise rates again within the next few months and companies are borrowing at a faster pace than they’re increasing their incomes.
China’s economic transition has caused a problem for the government—how to avert a sharp slowdown while keeping a lid on ballooning debt. In a report Thursday, rating agency Standard and Poor’s highlighted the “tough choice between supporting growth and controlling debt sustainability” as China tries to find new ways to fund public investments. “Although aggregate and provincial GDP growth stabilized in the first two quarters of 2016, we believe the fiscal conditions of Chinese local governments are under more pressure given the weakened economy,” S&P analysts wrote in a report. The rising debt pile of local government financing vehicles (LGFV) raised questions on credit risks, said S&P.
“As long as investments remain a growth impetus, it is very hard to shift away from the old public financing model to weaken the LGFVs’ role in public investment,” said S&P credit analyst, Xin Liu. “The growing pile of LGFV debt will add to the fiscal vulnerability of local governments, which already rely on these financing vehicles to execute public investment mandates,” she added. S&P’s warning on local government debt comes amid concerns about overall debt levels in the country as the world’s second-largest economy begins to slow after years of boisterous growth. Corporate debt is also under focus. In another report released on Tuesday, S&P warned that the “unabated growth” of China’s corporate debt could cost the country’s bank “dearly”.
It said the current growth rate of China’s debt “is not sustainable for long”. S&P said if the growth in debt doesn’t slow, the ratio of problem credit to total credit facing China’s banks could triple to 17% by 2020. The banks may then need to raise fresh capital of up to 11.3 trillion Chinese yuan ($1.7 trillion), which is equivalent to 16% of China’s 2015 nominal GDP. The Bank of International Settlements warned recently excessive credit growth in China will increase the country’s risk of a banking crisis in the next three years.
China’s renewed export weakness is coinciding with a clampdown on surging home prices and corporate debt, stoking expectations policy makers will allow further yuan depreciation to buffer the economy. Exports in September dropped the most since February amid anemic global demand (-10%), while imports declined 1.9%, leaving a $42 billion trade surplus. Analysts at Bank of America, RBC and Capital Economics estimate further depreciation for the yuan, already near a six-year low. With S&P Global Ratings and the International Monetary Fund among those warning about the threats from rapid credit expansion, policy makers risk cooling the economy with new property restrictions. But their plan for economic growth of at least 6.5% this year leaves little room for maneuver.
The upshot: a weaker yuan is needed to support an industrial sector that’s returning to profitability as it emerges from four years of deflation. “China is running out of options and letting the yuan go is the lowest-cost option for them,” said Sue Trinh, head of Asia FX strategy at RBC Capital Markets in Hong Kong. “We’ve seen them move in this direction. There’s more work to do.” The yuan is headed for the biggest weekly decline since January as mainland markets returned from holiday to face intensified depreciation pressures from a rising dollar. The yuan has dropped 3.4% against the dollar this year, the biggest decline in Asia. While depreciation’s not helping exporters in dollar terms, it cushions the blow when their shipments are counted in local currency terms, underpinning a recovery in industrial profits.
Banks in China’s financial hub Shanghai have been asked by authorities to limit loans to property developers for land purchases and to scrutinize would-be borrowers suspected of trying to access mortgages by getting divorced, the Shanghai Daily reported on Friday. The steps were the latest in a string of measures around the country to try to cool a property market seen at risk of overheating. Quoting unidentified commercial bankers, the newspaper said banks were told that housing developers should pay at least 30% down on residential projects instead of relying on bank loans.
It said some developers had put only 10% down on projects and raised the remaining funds through bank and gray-market loans. Banks were also asked to reject mortgage applications of people who had divorced within three months, it quoted an internal filing from a Shanghai-based rural commercial bank as saying. A property price rally has prompted a home buying frenzy in parts of China, in some cases prompting couples to get divorced to circumvent buying restrictions and invest in multiple homes. Police last month detained seven property agents in Shanghai for spreading rumours of plans for a new government regulation that caused a rash of divorces and a rush to buy new homes.
Britain is in danger of misreading the political landscape in Europe and faces the possible loss of its reserve currency status if it fails to secure full access to the European single market, Standard & Poor’s has warned. The powerful US rating agency said the British government is treading into hazardous waters in negotiations with the EU and is risks serious damage to economy’s future growth trajectory, with long-term implications for the debt profile and the country’s credit-worthiness. S&P fears that loss of unfettered access to the single market would have incalculable consequences for business, yet the Government so far appears almost insouciant about this.
“There seems to be this view that ‘we’re a big important economy, the Europeans export a lot to us, so they have got to give us what we want’, but is that really true?” said Ravi Bhatia, the director of sovereign ratings in charge of Britain. “Individually most of these countries don’t export that much to the UK, and were seeing a hardening of attitudes,” he said. Mr Ravi said Britain has limited scope for a spree on infrastructure projects and is walking a fine line on budget policy. “Before Brexit, the trajectory was planned fiscal consolidation, but we’re no longer certain we’re going to see that,” he said. “If they ramp up fiscal spending they’ll get a stimulus and that is good in one way as it will help boost growth, but they have to finance that spending; it will raise the deficit, and the debt stock is already high,” he told the Daily Telegraph.
Standard & Poor’s stripped Britain of its AAA status immediately after the Brexit vote in June, slashing the rating by two notches to AA, although the move was well-flagged in advance. It described the vote as seminal event that would lead to a “less predictable, stable, and effective policy framework in the UK”. The agency will issue its next verdict at the end of this month. Any further downgrade at this delicate juncture would be more serious, amounting to a red card on the Government’s hard-nosed rhetoric and negotiating tactics It is unprecedented for a AAA state to lose three notches in a matter on months.
Hundreds of British properties suspected of belonging to corrupt politicians, tax evaders and criminals could be seized by enforcement agencies under tough new laws designed to tackle London’s reputation as a haven for dirty money. Huge amounts of corrupt wealth is laundered through the capital’s banks. The National Crime Agency believes up to £100bn of tainted cash could be passing through the UK each year. Much of it ends up in real estate, and in other assets such as luxury cars, art and jewellery. The criminal finances bill, published on Thursday, is designed to close a loophole which has left the authorities powerless to seize property from overseas criminals unless the individuals are first convicted in their country of origin.
It will introduce the concept of “unexplained wealth orders”. The Serious Fraud Office, HM Revenue and Customs and other agencies will be able to apply to the high court for an order forcing the owner of an asset to explain how they obtained the funds to purchase it. The orders will apply to property and other assets worth more than £100,000. If the owner fails to demonstrate that a home or piece of jewellery was acquired using legal sources of income, agencies will be able to seize it. The law targets not just criminals, but politicians and public officials, known as “politically exposed persons”. Depending on how quickly it passes through parliament, the bill could come into force as early as spring 2017.
“There are some hundreds of properties in the UK strongly suspected to have been acquired with the proceeds of corruption,” said the campaign group Transparency International, which has been pressing for the new measures. “This will provide low-hanging fruit for immediate action by law enforcement agencies, if those agencies are properly resourced.”
Advisers concede there is a tug-of-war between the supply-siders and the protectionists, but Mr. Kudlow said he saw similar disagreements in the White House as a budget official for President Ronald Reagan. And Mr. Navarro, whose trade skepticism closely reflects Mr. Trump’s public views, said the campaign is “very much united” on trade. When Mr. Navarro ran for Congress two decades ago, Hillary Clinton, then the first lady, campaigned at one of his San Diego rallies. “Pure serendipity—sweet manna from heaven,” he wrote in a book recounting the campaign. He sought to oust the Republican incumbent by making the race a referendum on then-GOP House Speaker Newt Gingrich. Last month, Mr. Navarro flew with Messrs. Trump and Gingrich to a rally in Fort Myers, Fla. He now says he was “seduced” by the Clintons and “over time, that seduction has turned into betrayal and ultimately disbelief.”
Other top advisers include David Malpass, a Reagan administration official, who as chief economist of Bear Stearns in 2007 dismissed concerns that the housing sector would take the economy into a recession, let alone cause the financial crisis that brought down his bank. When he first met Mr. Trump before a rally in an airplane hangar at Dallas’ Love Field last year, conservative economist Stephen Moore pushed back against Mr. Trump’s invitation to join the campaign. “I can’t work for you because I’m free trade, and I know you’re more of a protectionist,” Mr. Moore recalled saying. Mr. Trump said they could “agree to disagree on that issue,” Mr. Moore said. Advisers say Mr. Trump’s decision to hire people he doesn’t fully agree with shows maturity. “Hillary is more like the red army, with everyone marching in lockstep,” said Mr. Kudlow.
Italians are about to have their say on Prime Minister Matteo Renzi and the economy isn’t doing him any favors. When the country holds a referendum on a key constitutional change Dec. 4, many voters will have more than “Yes” or “No” on their mind. They’ll probably take the opportunity to vent their frustration over the snail’s pace of growth after the latest recession. [..] All but one of Italy’s main polling firms signaled this month that “No” will prevail in the referendum, with surveys saying on average that the reform will be rejected by 52.2% of voters, up from 50.4% in September. To make things potentially worse for Renzi, just three days before the vote, Italians will learn whether the recovery resumed after stalling in the three months through June, when the national statistics office publishes its final reading of third quarter GDP.
“We might go to the polling stations in the wake of a negative GDP figure,” said Alberto Bagnai, who teaches economics at Gabriele d’Annunzio University in Pescara. “That could have a direct impact on the vote.” While recent industrial data have exceeded expectations, confidence among households and executives about the outlook is not very optimistic. Renzi himself acknowledged that economic concerns might influence voters and has tried to reassure them. Last week, the premier and his Finance Minister Pier Carlo Padoan repeatedly defended the government’s above-consensus target of 1% growth next year. The central bank called the goal “very optimistic” – a code phrase signaling difficulties ahead.
The EU’s once-mighty trade negotiators never dreamed that their powers would be stripped from them so unceremoniously – and possibly for good. The Francophone parliament of the Federation of Wallonia-Brussels – only 10 minutes’ walk from EU headquarters — stands to win a place in history for sinking the EU’s landmark trade deal with Canada and potentially for scuppering the European Commission’s ability to lead the world’s biggest trade bloc for many years. Failure to conclude the Comprehensive Economic and Trade Agreement (CETA) by this month’s deadline would be a devastating blow to the EU, which has spent seven years working on the tariff-slicing agreement with Ottawa.
“It’s crazy. If we allow a regional parliament to block a trade deal that will benefit the whole EU, where does this lead us to?” said Christoph Leitl, president of the Global Chamber Platform, a worldwide alliance of business chambers. “CETA is not just a deal with Canada, it has model character for Europe’s future trade relations.” The Federation of Wallonia-Brussels parliament, which focuses on the cultural and educational concerns of 4.5 million French speakers in Belgium, voted Wednesday evening to reject CETA because of worries about public services and agriculture. [..] Unless the Belgian central government can find an imaginative compromise quickly, the EU will be unable to corral the signatures of all 28 EU countries before an EU-Canada summit on October 27.
Migrants rescued at sea should be taken to centers in north Africa where their claims for asylum in EU countries can be studied, German interior minister Thomas de Maiziere proposed Thursday. De Maiziere made the suggestion as he arrived for a Luxembourg meeting of EU interior ministers who are trying to slow the migrant flow from Libya to Italy after a March deal with Turkey sharply reduced the influx to Greece, the main entry point for Europe last year. “People who are rescued in the Mediterranean should be brought back to safe accommodation facilities in northern Africa,” de Maiziere told reporters. “Their need for protection would be verified and we would put into place a resettlement to Europe with generous quotas, fairly divided between the European countries,” the minister said.
“The others have to go back to their home countries,” he added. EU countries, confronting populist opposition to refugees, have long feuded over quotas for relocating asylum seekers from Greece and Italy as well as for resettling people from refugee camps. De Maiziere did not mention a specific country in north Africa but EU officials have been discussing efforts to curb the migrant flow with Libya, the main transit point for African migrants heading to Europe. However, Libya’s new national unity government last week rejected calls from some EU countries to build refugee camps on its shores, saying the bloc could not “shirk its responsibility” while it struggled to restore peace and stability.
Canadian house prices jumped 11.7% in September from a year ago, according to The Teranet–National Bank National Composite House Price Index released today. But the index papers beautifully over the dynamics in each metro. In six of the 11 metro markets of the index, prices have been languishing or even declining over the past couple of years, as they’ve hit the wall of reality after often stupendous price gains in the prior decade: Montreal, Calgary, Edmonton, Quebec City, Halifax, and Ottawa-Gatineau. In the two largest markets – Toronto and Vancouver, which combined account for 54% of the index – prices have blown through the roof. Both markets are among the hottest, most over-priced housing bubbles in the world.
UBS recently ranked Vancouver Number 1 globally on that honor roll. But suddenly the dynamics have changed. Vancouver’s housing market is in turmoil, to use a mild word, as sales have crashed, after the implementation of a real-estate transfer tax this summer by British Columbia, aimed squarely at non-resident investors. In Vancouver, those investors are mostly Chinese. And where do these folks now go to inflate prices? Toronto. Still, the national house price index (red line, right scale), after the 11.7% jump over the past 12 months (blue columns, left scale), has doubled since 2005!
The index, similar to the Case-Shiller Home Price index in the US, is based on repeat sales. It looks at properties that sold at least twice over the years to establish “sales pairs.” It then uses a proprietary formula to deduct price changes from these transactions and extrapolate them into an index for each of the 11 markets and nationally. It’s not perfect, but it offers an alternative view to median prices or Canada’s “benchmark” prices. Prices in Toronto have been spiking (red line, right scale), with double-digit year-over-year%age gains (blue columns, left scale) so far this year, including a breath-taking 16% in September.
Vancouver makes Toronto look practically tame. Vancouver went completely crazy, with year-year-over price gains reaching 26% in the summer. Now a new reality went into effect. Market activity has collapsed, as no one knows what anything is worth, with buyers and sellers jockeying for position. And on a monthly basis, the index was essentially flat (+0.2%):
Most Canadians have not seen their incomes rise anywhere near the rate of the house price inflation of the past many years, if their incomes rose at all. Thus, many of them have been priced out of the housing market, or have access to it only via highly risky financing schemes that put both lenders and borrowers at risk, despite historically low interest rates. Once enough people are priced out of the housing market, demand collapses. This would normally be where housing bubbles deflate in a very painful manner for lenders, homeowners, and everyone getting their cut, including governments and the real estate industry. But there has been a strong influx of mostly Chinese investors that need to get their money, however they obtained it, out of harm’s way at home, and they pile into the market, and they don’t care what a property costs as long as they think they can sell it for more later.
It’s Labor Day weekend, and despite unemployment under 5% and nearly 15 million private-sector jobs created since February 2010, nobody’s celebrating. Workforce participation is stuck near historic lows, six million people are part-timers but want to work full time, and wage growth remains subdued. Both presidential candidates have talked a good game about jobs and the economy, but neither addresses the real problem. The U.S. job-creation machine—once the envy of the world—is broken, because American corporations cannot create steady, well-paying jobs here in the USA while also providing maximal returns to their investors, who are really in charge. So says Gerald Davis, a professor at the University of Michigan’s Ross School of Business, who has studied these issues for years.
A short piece he wrote late last year for Brookings and a new book, “The Vanishing American Corporation,” trace the big changes in American corporations from the job-rich giants of the post-World War II era to job killers now, because the mission of the corporation has changed radically. Corporations’ new, exclusive emphasis on shareholder value—enforced by executive-compensation packages in which equity comprised 62.2% of S&P 500 CEOs’ total compensation in 2015, according to Equilar—has pushed top executives to replace humans with robots, send jobs overseas or bring in lower-paid immigrants to do them here, hire part-time or temporary workers (or glorified day laborers and Uber “contractors”) instead of full-time ones, and lay off thousands of employees even when profits are soaring.
Cutting labor costs boosts earnings, which tends to push stock prices (and executive compensation) higher, and frees up cash for more “important” things like dividends or share buybacks. As of March, S&P 500 companies had bought back more than $2 trillion in stock over the last five years, making buybacks the biggest source of demand for stocks since 2009, HSBC estimated. That makes big pension funds and “activist” investors like Carl Icahn happy, but it’s bad news for the millions of Americans who still yearn for well-paying middle-class jobs that offer career advancement, decent health-care coverage, and retirement security. “Under our current conditions, creating shareholder value and creating good jobs are largely incompatible,” Davis wrote in his Brookings piece. “Corporations are ‘job creators’ only as a last resort.” “Companies do not exist to create jobs. You don’t get rewarded for creating jobs..”
21 Months… US Factory Orders have decline year-over-year every month since October 2014 (the end of QE3). This is the longest period of decline in US history (since 1956) and has always indicated the US economy is in recession… While headlines will crow of 1.9% MoM gain (which missed expectations of a 2.0% rise), the trend is simply ugly: Year-over-year Factory Orders fell 3.5%. As Bloomberg also notes, there’s one key takeaway from the Commerce Department’s report Friday on U.S. factory orders. The value of unfilled orders dropped in July to the lowest level in two years, indicating producers are having an easier time meeting demand.
With soft sales, factories have little reason to add as many workers to their payrolls and may find it difficult to raise prices. Employment in manufacturing dropped 14,000 in August, the most in three months, another report from the Labor Department showed Friday. • Unfilled orders to all manufacturers fell 0.1% to $1.13 trillion, the lowest since June 2014, after a 0.9% slump. • Unfilled orders have increased just once since November. • Total factory orders rose 1.9% in July after a 1.8% drop. Just another WTF chart to ignore.
You’d have to go back to the months following the financial crisis to find so many companies facing potentially ruinous debt problems. That’s according to the latest tally by S&P Global Ratings of “weakest link” issuers. S&P counted 251 with ratings at the low end of junk status and a negative outlook, the most since October 2009, when the total was 264. The issuers collectively have about $359 billion of debt outstanding, led by energy companies, according to S&P’s Sept. 1 report. “Weakest links maintain an important role as potential default indicators,” Diane Vazza, S&P’s head of global fixed income research, said in the report.
They’re almost 10 times more likely to miss payments than ordinary speculative-grade issuers, Vazza wrote, adding that 71 of 100 companies that defaulted this year had been previously tagged as weakest links. The oil and gas sector contributed 62 issuers, or about 25% of the total, as stress on commodities markets continues. Eight of the August additions were from that industry, including Chesapeake Energy and Hornbeck Offshore Services. Financial institutions followed with 34 issuers, or 14%. Other newcomers included Tesla Motors, Elon Musk’s cash-strapped electric-car maker, and Intelsat SA, the satellite operator that proposed a private bond exchange offer, which S&P labeled “a distressed restructuring and tantamount to default.”
S&P assembled the list based on the number of borrowers rated B- or lower with either negative outlooks or negative implications on Credit Watch that indicate a strong possibility of further downgrades. The number hit its record high of 300 issuers in April 2009. The U.S. speculative-grade corporate default rate grew to 4.8% in August after seven defaults, and is expected to reach 5.6% by June 2017, S&P said in a separate report. The U.S. speculative-grade default rate for energy issuers is 21.7% as of July 31, Vazza said.
The number of common stocks traded on major U.S. exchanges are the fewest in three decades. As CNBC reports, “Currently, there are just 3,267 stocks in the University of Chicago’s CRSP data, and this is the lowest since 1984,” wrote longtime Jefferies equity strategist Steven DeSanctis. What’s behind this phenomenon? DeSanctis explains: “Between the lack of IPO activity, the pickup of M&A, and buybacks, the U.S. equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes. Companies may not want to come public due to the additional cost of Sarbanes-Oxley or the fact that the private market has become a bigger source of financing than it has been in the past.”
So whether it’s the total number of stocks or the amount of shares for each company outstanding, the stock market is shrinking. Or as Dark Bid’s Daniel Drew previously noted, The Stock Market Is Disappearing In One Giant Leveraged Buyout It’s easy to find critics and doomsayers who predict that the next stock market crash is just around the corner. They could be right, but another possibility is that the stock market itself will disappear entirely. Anyone who is familiar with mergers and acquisitions knows what happens when a company is being slowly acquired. The price climbs higher, slowly yet relentlessly. Liquidity evaporates as offers are lifted. If the price moves up too quickly, buy programs are canceled. The buyer waits until the froth dies down a little before resuming purchases.
Eventually, the bids reappear, and the process continues. Once the buyer acquires 5% of the company, a legal requirement is triggered: the SEC requires the buyer to file Schedule 13D, otherwise known as a “beneficial ownership report.” Once this report is filed, everyone can see the buyer, and the stock price will usually jump. This same process has been underway in the stock market over the last 6 years. The market is up well over 200%. Liquidity has evaporated in the S&P 500 futures market, and the central banks themselves are buying S&P 500 futures. Companies are spending nearly all of their profits on stock buybacks. All of this activity harms employees. William Lazonick discussed the negative effects in a Harvard Business Review article called “Profits Without Prosperity.” According to Lazonick, the American economy has transformed from a system of value creation to one of value extraction.
The U.S. economy appears strong enough to warrant significantly higher interest rates, Richmond Federal Reserve Bank President Jeffrey Lacker said on Friday. Lacker, who is not a voting member of the U.S. central bank’s rate-setting committee this year, said he still favors raising rates sooner than later and that the Fed’s last policy meeting in July would have been a “good time” to tighten policy. Speaking to a group of economists in Richmond, Lacker argued that a range of economic analysis suggests the Fed’s benchmark overnight interest rate – the federal funds rate – is currently too low. “It appears that the funds rate should be significantly higher than it is now,” he said in the speech. He made his comments after the U.S. government reported a hiring slowdown in August that could effectively rule out a rate increase later this month.
While Lacker is not due to have a vote on policy until 2018, he does participate in discussions on interest rates. The Fed has appeared sharply divided between policymakers who favor rate increases soon and those who urge more caution. Those favoring caution appeared to get a boost on Friday when a report showed 150,000 U.S. jobs were created last month, fewer than expected. But Lacker said the weaker pace of hiring still left the job market on a strengthening path and the case for higher rates would only grow stronger unless job growth slowed “significantly in the months ahead.” He suggested there were increased risks in waiting to raise rates. “The way the data is playing out I think the longer we wait there is a material increase in risks that we run,” Lacker told reporters after his speech.
The Federal Reserve is expected, sooner or later, to raise its key interest rate for a second time since the financial crisis – a feat not in sight for other major developed-nation central banks. It’ll depend on if the economy is doing well, and policy makers may take comfort that the U.S. ranking has fallen in a gauge of economic misery. With the unemployment rate at 4.9% and inflation at 0.8%, the U.S. Misery Index score of 5.7 has improved since the financial crisis, though it lags behind Switzerland, Japan, the U.K. and New Zealand. All these nations’ central banks are poised to hold rates at record lows, or cut them further, according to surveys conducted by Bloomberg. The Misery Index is a simple calculation adding the rate of unemployment and inflation, with lower scores indicating a healthier economy.
But if you think the four countries that are beating out the U.S. in terms of misery are doing everything right, think again. Japan and Switzerland, both of which have brought their rates to negative levels in an attempt to boost lending, are suffering from deflation, which is helping bring down their Misery Index scores. New Zealand, though faring a bit better economically, is also expected to cut its central bank rate as inflation remains suppressed, and the U.K. will do so as policy makers attempt to counteract the fallout from Brexit.
The European Central Bank has added a digit to its odometer to read 1,000,000,000,000. Euros, not kilometers. That’s the amount of excess liquidity now sloshing through the financial system – equivalent to almost €3,000 ($3,360) for each of the 340 million people in the 19-nation region. The money is created by the ECB through a program of quantitative easing and bank loans, and is aimed at bringing inflation closer to its goal of just under 2%. It’s labeled “excess” because it’s the amount over and above what’s immediately needed by the banking system to serve the economy. That’s why it’s inflationary. But no matter how often the money is lent to companies and households, at the end of each day it lands at the central bank where commercial institutions have their accounts.
And because the ECB’s stimulus package also includes a negative deposit rate of 0.4%, lenders are charged for that surplus cash. With excess liquidity passing €1 trillion as of Sept. 1, the ECB now makes more than €11 million a day in interest from the deposit facility alone. Though that’s just a fraction of the institution’s revenue. “Earnings related to QE are more decisive for net income,” said Michael Schubert, an economist at Commerzbank in Frankfurt. “It was the bigger factor in the past years.” There is no single profit and loss account for the 19 national central banks and the ECB; everyone publishes their own. Germany’s Bundesbank, which implements monetary policy in Europe’s largest economy, made €248 million last year from charging interest for deposits and nearly €2 billion from past and present asset-purchase programs.
The ECB may soon be forced to follow the Bank of Japan’s example and buy equities as part of any expanded stimulus programme, but it faces significant hurdles in helping all 19 euro zone members equally without distorting a key market for investors. The European Central Bank could run out of eligible bonds for its €1.7 trillion bond-buying scheme, meaning alternative options are on the table should it decide to loosen policy further to lift growth and inflation across the bloc. Analysts say these could include large-scale share buying, a policy that the BOJ has already adopted after it started purchasing equity exchange traded funds (ETFs) for its own quantitative easing scheme six years ago.
ETFs allow an investor to trade a range of assets, from a basket of stocks to government debt. ETFs, which offer a convenient way to purchase a broad basket of securities in a single transaction from an exchange, have risen in popularity with investors due to their simplicity and lower fees. But buying ETFs in the 19-nation euro zone would be far from simple for the ECB, both practically and politically. “How do you buy an index which favours all countries within the euro zone? Obviously the ECB doesn’t want to be seen favouring one market above another,” said Commerzbank economist Peter Dixon.
The BOJ doubled its ETF purchases in late July to an annual pace of 6 trillion yen ($58 billion). According to SPDR ETFs, the BOJ is now estimated to hold almost 50% of the total Japanese ETF market. Investments in Europe-listed ETFs are worth just over $500 billion, compared with nearly $200 billion in Japan and more than $2 trillion in the United States, according to consultancy firm ETFGI. Although the European ETF market is bigger than Japan’s, such a scheme would have to benefit 19 member states, from heavyweight Germany to much smaller Slovakia.
U.S. retailers, bracing for a blow as they stock up for the crucial holiday sales season, asked the government to step in and help resolve a growing crisis caused by the near-collapse of South Korea’s Hanjin Shipping , one of the world’s largest container shipping companies. “While the situation is still developing, the prospect of harm is significant and apparent,” Sandra Kennedy, president of the Retail Industry Leaders Association, wrote in a letter to the Department of Commerce and the Federal Maritime Commission. Hanjin’s recent bankruptcy filing “presents an enormous challenge to U.S. shippers,” she said, and “could have a substantial impact on consumers and the economy at large.”
The trade group is urging the U.S. to work with ports, cargo handlers and the South Korean government to resolve the widespread disruption in freight shipments caused by the Hanjin bankrupcy filing. A spokesman for the Retail Industry Leaders Association said they’re hoping the South Korean government could help provide clarity and speed to the bankruptcy proceedings, which are being considered by courts there. Hanjin handles about 7.8% of the trans-Pacific trade volume for the U.S. market, Ms. Kennedy’s letter said. Since the shipping company filed for bankruptcy protection in a Seoul court Wednesday, terminal operators, ports, cargo handlers, truckers and others have refused to handle its cargo, for fear they won’t get paid. That is causing turmoil at U.S. ports and beyond, said shippers, importers and freight forwarders.
There’s no maybe involved. The only way to finance Tesla was to agree to buy back its own second hand cars from lenders, or in other words: “..Tesla began providing “residual value guarantees” to those “leasing partners.”
It’s well known that Tesla is deploying gigantic amounts of capital to boost sales from a projected 50,000 vehicles this year to half-a-million in 2018. That’s arguably the most ambitious goal in corporate America. To make it happen, Musk has grown Tesla’s asset base from $1.3 billion at the end of 2013 to $11.9 billion by June 30, following a $1.7 billion equity raise in the second quarter. Now, Tesla will need to accelerate its capital-raising program to fund the SolarCity deal. It’s absolutely typical for a startup racing to build new plants and R&D centers to burn a lot more cash than it generates. Investors and analysts are mostly optimistic, predicting that Tesla will in a few years exploit its heavy investment by generating big positive and fast-growing cash flows.
Hence, it’s crucial to examine the arc of Tesla’s cash flows to project when, and if, it will become profitable. As with its other pro-forma measures, Tesla’s version of cash from operations looks a lot better than the official numbers. So which is the right figure for investors? As it reported in its 10K for 2015, Tesla made a major concession to an important group of customers. The shift was aimed at strengthening a fast-growing business, sales of vehicles to banks that lease its model S and X vehicles to end-customers. In the past, Tesla simply sold the autos to its leasing customers, with no strings attached. The banks had no right to get money back from Tesla if, for example, the market for used electric vehicles dropped, forcing them to sell at lower-than-expected prices when the leases ended.
But starting in the fourth quarter of 2014, Tesla began providing “residual value guarantees” to those “leasing partners.” Those guarantees state that when the lease expires, typically after three years, the bank has the option of selling the car back to Tesla at a fixed, pre-determined price. Or, if the lessor chooses to sell the cars on its own and receives less than the guarantee amount, Tesla must cover the shortfall. Of course, customers have the option of buying the Model S or Model X for a fixed price at the end of the lease period, and if a customer does keep the car, Tesla’s liability ends. But if a customer decides not to buy, the bank can return the car to Tesla and pocket the guaranteed price, or sell the three-year old vehicle on the nascent green used car market. Either way, Tesla takes a big loss, and effectively returns a lot of the original “purchase” price, if rates for used S and X’s drop.
A “correction” in the apartment market could see sharp falls in all Australian home prices and a nationwide recession, a gloomy bank analyst report on the housing market warns. The report by analysts CLSA paints a “base case” scenario which says Australia’s housing cycle has “peaked,” with household debt now extending the country’s property bubble. The shift by big banks to tighten lending standards is likely to cause a “correction” and “crisis” in cheap apartments which will spread, leading to defaults among smaller developers and a sharp contraction in construction, CLSA says.
The “worst case” scenario foresees “dwelling prices falling sharply in all areas, eventually leading to a recession,” the report’s authors, respected former banking analyst Brian Johnson, and his colleagues say. “Issues of affordability and household debt are overextending Australia’s real estate bubble, which is being held aloft by foreign capital,” they say. “Our base case has the crisis starting with cheap apartments and later spreading to other flats in close proximity.” The authors put a “sell” recommendation on stocks of companies most likely to be affected by the crunch, including the country’s biggest bank CBA and listed property giant Lendlease. Another property player Mirvac would also be impacted, they said.
Mr Johnson and co. said they believe a correction in the housing market will start with settlement problems among apartment buyers, where purchasers who stumped up a 10% deposit simply walk away leaving developers to recoup the money or resell the unit. Under the “base case” scenario the contagion from falling apartment prices has a “muted” impact on single-family homes and is not enough to push the economy into recession. The risk of the “worst case” happening, which predicts sharp price falls and a recession, is increased because Australian household’s are holding debt that is at 122% of GDP and house prices are 12 times price to income ratios, the authors say.
Multinationals like coffee chain Starbucks and online retailer Amazon pay less tax in Austria than one of the country’s tiny sausage stands, the republic’s center-left chancellor lamented in an interview published on Friday. Chancellor Christian Kern, head of the Social Democrats and of the centrist coalition government, also criticized internet giants Google and Facebook, saying that if they paid more tax subsidies for print media could increase. “Every Viennese cafe, every sausage stand pays more tax in Austria than a multinational corporation,” Kern was quoted as saying in an interview with newspaper Der Standard, invoking two potent symbols of the Austrian capital’s food culture.
“That goes for Starbucks, Amazon and other companies,” he said, praising the European Commission’s ruling this week that Apple should pay up to €13 billion in taxes plus interest to Ireland because a special scheme to route profits through that country was illegal state aid. Apple has said it will appeal the ruling, which Chief Executive Tim Cook described as “total political crap”. Google, Facebook and other multinational companies say they follow all tax rules. Kern criticized EU states with low-tax regimes that have lured multinationals – and come under scrutiny from Brussels. “What Ireland, the Netherlands, Luxembourg or Malta are doing here lacks solidarity towards the rest of the European economy,” he said.
He stopped short of saying that Facebook and Google would have to pay more tax but underlined their significant sales in Austria, which he estimated at more than 100 million euros each, and their relatively small numbers of employees – a “good dozen” for Google and “allegedly even fewer” for Facebook. “They massively suck up the advertising volume that comes out of the economy but pay neither corporation tax nor advertising duty in Austria,” said Kern, who became chancellor in May.
Antibacterial soaps were banned from the US market on Friday in a final ruling by the Food and Drug Administration, which said that manufacturers had failed to prove the cleansers were safe or more effective than normal products. Dr Janet Woodcock, director of the FDA’s center for evaluation and research, said that certain antimicrobial soaps may not actually serve any health benefits at all. “Consumers may think antibacterial washes are more effective at preventing the spread of germs, but we have no scientific evidence that they are any better than plain soap and water,” she said in a statement. “In fact, some data suggests that antibacterial ingredients may do more harm than good over the long term.”
Manufacturers had failed to show either the safety of “long-term daily use” or that the products were “more effective than plain soap and water in preventing illness and the spread of certain infections”. The new federal rule applies to any soap or antiseptic product that has one or more of 19 chemical compounds, including triclocarbon, which is often found in bar soaps, and triclosan, often in liquid soaps. It does not affect alcohol-based hand sanitizers and wipes, which the FDA is still investigating, or certain healthcare products meant specifically for clinical settings. The FDA has given manufacturers a year to change their products or pull them off shelves.
Misery is making strange bedfellows in global markets. At a time when risky assets including stocks, commodities, junk bonds and emerging-market currencies are rallying to multi-month highs, so are the havens, from gold, government bonds to the Swiss franc and the Japanese yen. No matter that the U.S. labor market is deteriorating and the World Bank has just cut its estimates for global economic growth. Investors either don’t believe the news is bad enough to kill a global recovery that’s already long in the tooth, or they’re betting that sluggishness in some of the biggest economies means central banks will stay more accommodative for longer.
“Everything is being driven by high liquidity that ultimately is being provided by central banks,” Simon Quijano-Evans at Commerzbank, Germany’s second-largest lender, said in London. “It’s an unusual situation that’s a spill over from the 2008-09 crisis. Fund managers just have cash to put to work.” For much of the time since the financial meltdown eight years ago, investors have been in the mindset that bad economic data is good news for markets. The near-zero interest-rate policies by major central banks – and negative borrowing costs in Japan and some European nations – have pushed traders to grab anything that offers yield. And every indication that the liquidity punch bowl will stay in place is greeted by markets with a cheer.
Since a surprise interest-rate cut at his first meeting as ECB President, Mario Draghi has shown a penchant for pushing the envelope. The bank’s entry into the corporate bond market on Wednesday was no exception: buying bonds with junk ratings. Purchases on the first day included notes from Telecom Italia, according to people familiar with the matter, who aren’t authorized to speak about it and asked not to be identified. Italy’s biggest phone company has speculative-grade ratings at both Moody’s Investors Service and S&P Global Ratings. The company’s bonds only qualifies for the central bank’s purchase program because Fitch Ratings ranks it at investment grade.
By casting his net as wide as the program allows, Draghi ensured that the first day of corporate bond purchases made an impact. While the ECB has said it would buy bonds from companies with a single investment-grade rating, investors expected the central bank to start with the region’s highest-rated securities. “It’s been an aggressive start to the program,” said Jeroen van den Broek at ING Groep in Amsterdam. “The wide-reaching nature of the purchases shows Draghi means business.” [..] Telecom Italia’s bonds are in Bank of America Merrill Lynch’s Euro High Yield Index and credit-default swaps insuring the notes against losses are part of the Markit iTraxx Crossover Index linked to companies with mostly junk ratings.
Moody’s and S&P have ranked Telecom Italia one level below investment grade, at Ba1 and an equivalent BB+ respectively, since 2013. Fitch puts the company at the lowest investment-grade rating and only revised its outlook on that level to stable from negative in November. “This dispels any doubts investors may have had about the commitment of the ECB and the central banks to tackle lower-rated names,” said Alex Eventon at Oddo Meriten Asset Management. “Telecom Italia is firmly at the weak end of the spectrum the ECB can buy.”
Greece will enter the ECB’s quantitative easing (QE) program “soon,” Finance Minister Euclid Tsakalotos told Bloomberg in an interview on Wednesday. However, the Greek government’s optimism is not shared by banking sources and analysts, who estimate that Greece’s inclusion in ECB Governor Mario Draghi’s bond-buying program will be tied to the successful completion of the second bailout review in the fall, as well as the progress in talks on settling the problem of the Greek national debt.
In his interview Tsakalotos went as far as to say that Greece will join the QE program by September, stressing that such a development would open the way for the lifting of the capital controls and the gradual restoration of investor trust. He also said that the ECB will start accepting Greek bonds as collateral for loans after Athens completes the July debt repayments to Frankfurt. “I feel confident the Greek bonds will be eligible” by September, he predicted. He also forecast that once Greece enters the QE program, depending also on the decisions on the country’s debt, “you can take Grexit off the table,” referring to the possibility of a Greek exit from the eurozone. “Then you have a straight runway for investors,” he added in the same optimistic spirit.
Junk-rated companies in Europe are hurrying to refinance debt, locking in borrowing costs at one-year lows amid concerns that a U.K. referendum on EU membership will paralyze markets. Leveraged-loan borrowers are poised to raise more money in euros this week for refinancing than in the whole of May, according to data compiled by Bloomberg. The amount amassed for repaying old debt from selling high-yield bonds is on track to be equal to about two-thirds of comparable sales last month. Companies including Altice and Verisure Holding have entered the market as the start of corporate-bond purchases by the ECB on Wednesday has driven down borrowing costs across the continent.
The window may prove short-lived as banks including Goldman Sachs have said a June 23 vote in favor of a Brexit could roil European markets and endanger economic growth. “It’s possible that uncertainty will rise as we approach the Brexit referendum,” said Colm D’Rosario at Pioneer Investment Management. “Issuers won’t want to wait until then.” Companies may sell about €2.5 billion of leveraged loans and at least €2.6 billion of high-yield bonds for refinancing this week, the Bloomberg data show.
Deflationary pressures in China’s industries eased further in May, while consumer price gains continued to be subdued enough to offer the central bank scope for more easing if needed. Amid a drive by the Communist Party leadership to cut excess capacity, producer prices fell 2.8%, the least since late 2014 and less than the 3.2% decline economists had estimated in a Bloomberg survey. The consumer price index rose 2% from a year earlier, less than the median forecast of 2.2%. Easing factory-gate deflation is the latest signal of stabilization after more than four years of falling producer prices. Tepid consumer price gains may allow the People’s Bank of China, which has kept interest rates at a record low since October, room to add further stimulus in the short term to help prop up growth.
“The deflationary threat has substantially diminished,” said Raymond Yeung at Australia & New Zealand Banking Group in Hong Kong. “Domestic demand has stabilized so we don’t see a strong upward pressure either. We still think the PBOC will remain moderately accommodative.” [..] Mining and raw-materials producer prices slumped less in May than the previous month, though still recorded the biggest declines. Mining producer goods fell 9.6% last month, versus a 13% drop in April, while raw-material producer prices fell 7.2%, less than the prior month’s 7.7% decline, the statistics bureau reported.
“Firmer producer prices reflect a combination of factors,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. “Commodity prices are a big part of the picture, with oil and iron ore both down less sharply than in 2015. So, too, is slightly more resilient domestic demand. Capacity utilization remains extremely low in historical comparison, but has ticked up over the last few months.”
If March’s 116.5% surge in China imports from Hong Kong didn’t raise eyebrows as the veracity of the trade data, then perhaps following last night’s data drop, this month’s 242.6% explosion year-over in China imports from Hong Kong must at minimum deserve a second glance. As Bloomberg’s Tom Orlik previously noted, the implausible 242.6% YoY surge screams that China is clearly disguising capital flows… Trade mis-invoicing as a way to hide capital flows remains a factor. In the past, over-invoicing for exports was used as a way to hide capital inflows. The latest data show the reverse phenomenon, with over-invoicing of imports as a way of hiding capital outflows. Does this look “real”?
Global growth will slow this year as oil exporters in the developing world struggle to cope with lower energy prices, the World Bank has said in its half-yearly economic health check. The benefit of cheaper oil prices for Europe, Japan and other oil importing nations, which has sustained their growth through 2015 and 2016, has failed to offset a slowdown in parts of Africa, Asia and South America that depend on selling energy to sustain their incomes. In one of the gloomiest predictions by an international forecaster, the bank said the effect of the collapse in oil income on developing countries would restrict global growth to 2.4% this year, well down on its January forecast of 2.9%.
In the UK the growth rate will be restricted to 2% this year and 2.1% in 2017 and in 2018. The US will also stabilise at about 2% annually for the next couple of years, while the eurozone will expand at a more modest 1.6% in 2016 and in 2017 before slipping to 1.5% in 2018. The tumbling price of metals and food on world markets last year hit emerging and developing economies without triggering a significant rise in spending by richer countries. The Washington-based bank, which lends more than £25bn a year to developing countries, said weaker global trade, a downturn in private and public investment and a slump in manufacturing added to the woes of economies that have become dependent on high oil prices to bolster growth.
Gulf oil exporters must cut spending and narrow their budget shortfalls to keep their currencies pegged to the dollar, the IMF said. While substantial foreign assets have allowed the six members of the Gulf Cooperation Council to fix the value of their currencies to the greenback, keeping the status quo comes at a price as lower crude prices strain public finances, the lender said in a report titled “Learning to Live with Cheaper Oil.” “When a country faces prolonged fiscal and external deficits, policy adjustment must come from fiscal consolidation measures,” the IMF said in the report authored by Martin Sommer, deputy chief of its regional studies division. Maintaining the currency pegs “will require sustained fiscal consolidation through direct expenditure cutbacks and non-oil revenue increases,” it said.
As investors increased bets that currency fixes may become too expensive to maintain, the United Arab Emirates and Saudi Arabia renewed their commitment to their pegs – with the latter also said to ban betting against its currency. Gulf oil producers’ budgets swung from surplus to deficit as Brent crude fell by as much as 75% from June 2014 to January this year, before a partial recovery in recent months. Even after cutting spending, the combined budget gap in the GCC region – which also includes Kuwait, Qatar, Bahrain and Oman – as well as Algeria is expected to reach $900 billion for the period 2016-2021, and represent 7% of their gross domestic product in the final year, the IMF said. Their debt-to-GDP ratio is expected to rise to 45% in 2021 from 13% last year as governments issue debt to plug their budget gaps.
Iceland has gone its own way since its three largest lenders collapsed in 2008 under a mountain of debt almost eight times the size of its economy. The steps included capital controls that locked in hedge funds, mortgage writedowns and throwing bankers in jail. With the recovery well under way, the island nation – once a hedge fund paradise – is continuing on its isolated path. Lawmakers have effectively outlawed the kind of trade that inflated the bubble a decade ago, protecting against a repeat. Surrounded by sub-zero interest rates, Iceland’s benchmark gauge of 5.75%, the highest in the developed world, is luring cash from abroad. That’s unlikely to change any time soon.
“The problem is the ability to have an independent monetary policy and an independent monetary policy means the ability to have a different interest rate than the rest of the world,” central bank Governor Mar Gudmundsson said on Monday. “If that’s not possible, then you can’t have an independent monetary policy. And the problem of very significant interest rate differential – interest rates in Iceland are higher than the rest of the world – will not disappear overnight.” Both geographically and financially Iceland is a small island in vast, turbulent waters. Under the law enacted last week, the central bank over the weekend set rules that will force investors in Icelandic bonds to keep 40% of their investments in a 0% account for a year. That will limit the profit to be made from investing in Iceland, where government bonds offer yields of more than 6%.
Those type of returns are tempting in a world of near zero and even negative key rates. As evidence, the Icelandic krona has strengthened this year even as the central bank has been selling the currency to build up foreign holdings as it prepares to lift the capital controls that have been in place since 2008. But the country may have seen nothing yet, according to the governor. The new rules are a “precautionary” measure to stifle any major flows after the controls are lifted, he said. “There have been certain inflows in the last few months,” he said. “We thought there was a possibility of much greater inflows going forward, especially if the auction goes well and we take further steps to liberalize the capital account and the economy is booming and interest rates are high.”
The British judiciary has begun to draw its sword. For the first time since the European Court asserted supremacy and launched its long campaign of teleological conquest, our own judges are fighting back. It is the first stirring of sovereign resistance against an imperial ECJ that acquired sweeping powers under the Lisbon Treaty, and has since levered its gains to claim jurisdiction over almost everything. What has emerged is an EU supreme court that knows no restraint and has been captured by judicial activists – much like the US Supreme Court in the 1970s, but without two centuries of authority and a ratified constitution to back it up. This is what the Brexit referendum ought to be about, for this thrusting ECJ is in elemental conflict with the supremacy of Parliament. The two cannot co-exist. One or the other must give.
It is the core issue that has been allowed to fester and should have been addressed when David Cameron went to Brussels in February to state Britain’s grievances. It was instead brushed under the carpet. The explosive importance of Lisbon is not just that it enlarged the ECJ’s domain from commercial matters (pillar I), to broad areas of defence, foreign affairs, immigration, justice and home affairs, nor that this great leap forward was rammed through without a referenda – after the French and the Dutch had already rejected it in its original guise as the European Constitution. Lisbon also made the Charter of Fundamental Rights legally-binding. As we have since discovered, that puts our entire commercial, social, and criminal system at the mercy of the ECJ.
The Rubicon was crossed in Åklagaren v Fransson, a VAT tax evasion case in non-euro Sweden. The dispute had nothing to do with the EU. The Charter should come into force only when a country is specifically applying EU law. The ECJ muscled into the case on the grounds that since VAT stems from an EU directive, Sweden was therefore operating “within the scope of EU law”. This can mean anything, and that is the point. To general consternation, it ruled that Sweden had violated the double-jeopardy principle of Article 50 of the Charter. Almost nothing is safe when faced with a court like this, neither the City of London, nor our tax policies or labour laws, nor even our fiscal and monetary self-government. The ECJ can strike down almost any law it wants, with no possibility of appeal.
Greece’s asylum service on Wednesday launched a new scheme for processing registrations from migrants who want to apply for asylum in the country, a process that could take up to a year for many of the applicants, according to sources. The “recognition documents” issued to migrants to date will have their validity extended to cover a year. Many of the documents held by migrants in camps across the country have expired as they apply for six months for Syrians and just one month for all other nationalities.
Once the migrants have been registered, they will be issued with a yellow bracelet bearing their name and other personal details. The registration document and bracelet will grant each migrant the right to legal residence in Greece and access to free healthcare but will not give them permission to work in Greece which must be sought separately. The applicants will be informed by SMS about their interview, according to an official of Greece’s asylum service who said the interview could take place several months after their application “due to the large population of refugees in the country.”
Any chance Turkey could join the EU by 2020, as Brexit campaigners have asserted, went up in smoke on Wednesday after the country’s president, Recep Tayyip Erdogan, signed a draconian new law that in effect demolishes any notion that his country is a fully functioning, western-style democracy. EU rules dating to 1993, known as the Copenhagen criteria, insist all applicant states must adhere to a system of democratic governance and uphold other basic principles, such as the rule of law, human rights, freedom of speech, and protection of minorities. Turkey is struggling to meet these standards. The new measures make EU membership even more of a chimera.
They are expected to eviscerate parliamentary opposition to Erdog an’s ruling neo-Islamist Justice and Development party (AKP) by allowing politically inspired, criminal prosecutions of anti-government MPs. The main target is the pro-Kurdish Peoples’ Democratic party (HDP), which Erdog an accuses of complicity in terrorism, although other opposition parties are also affected. By signing the new law, Erdog an, who has dubbed the EU a “Christian club”, has signalled the end of any realistic chance of Turkey joining the union for the foreseeable future. Critics say he may also have sounded the death knell for Turkey’s secular democracy and set the stage for intensified armed conflict with Kurdish groups. Erdogan’s move comes against a backdrop of heightened violence between Turkey’s security forces and militants belonging to the outlawed Kurdistan Workers’ party (PKK) and its radical offshoots.
The leading academic theory of asset bubbles is that they don’t really exist. When asset prices skyrocket, say mainstream theorists, it might mean that some piece of news makes rational investors realize that fundamental values like corporate earnings are going to be a lot higher than anyone had expected. Or perhaps some condition in the economy might make investors suddenly become much more tolerant of risk. But according to mainstream theory, bubbles are not driven by speculative mania, greed, stupidity, herd behavior or any other sort of psychological or irrational phenomenon. Inflating asset values are the normal, healthy functioning of an efficient market. Naturally, this view has convinced many people in finance that mainstream theorists are quite out of their minds. The problem is, mainstream theory has proven devilishly hard to disprove.
We can’t really observe how investors in the financial markets form their beliefs. So we can’t tell if their views are right or wrong, or whether they’re investing based on expectations or because of changing risk tolerance. Basically, because we can usually only look at the overall market, we can’t get into the nuts and bolts of how people decide what prices to pay. But what about the housing market? Housing is different from stocks and bonds in at least two big ways. First, because house purchases are not anonymous, we can observe who buys what. Second, housing markets are local, so we can see what is happening around them, and thus have some sort of idea what information they are receiving. These unique features allow us to know much more about the decision-making process of each buyer than we know about investors in the anonymous national financial markets.
In a new paper, economists Patrick Bayer, Kyle Mangum and James Roberts make great use of these features to study the mid-2000s U.S. housing boom. Their landmark results ought to have a major effect on the debate over asset bubbles. Bayer et al. find that as the market overheated, the frenzy spread like a virus from block to block. They look at the greater Los Angeles area – a hotbed of bubble activity – from 1989 through 2012. Since they want to focus on people buying houses as investments (rather than to live in), the authors looked only at people who bought multiple properties, and they tried to exclude primary residences from the sample. They found, unsurprisingly, that the peak years of 2004-2006 saw a huge spike in the number of new investors entering the market. Here is the graph from their paper:
Red flags are rising on Corporate America’s debt. The average rating on U.S. corporate debt has hit nearly a 15-year low, according to a new report by Standard & Poor’s. “We believe corporate default rates could increase over the next few years,” according to S&P credit analysts Jacob Crooks and David Tesher. The average rating on companies that issue debt has fallen to ‘BB,’ or junk status. That is even below the average S&P rating for U.S. corporate debt during and in the aftermath of the financial crisis in 2008 and 2009. There are already concerns about energy companies defaulting on loans due to low oil prices. But new tech firms like Solera and media companies like iHeart too have had their credit rating downgraded this year, according to S&P. Since 2012, there’s been a surge in low-rated companies seeking cash.
In the past four years, S&P has assigned a single-B rating to 75% of companies accessing the debt markets for the first time. That rating is just one notch up from triple-C, a rating given to companies with a high probability of default. Companies with a single-B rating include PF Chang’s, Toys R US and Men’s Wearhouse (MW). That doesn’t mean they’re going to default: They’re just dangerously close to the territory where companies tend to default. The “rapid rise” in companies with low credit ratings accessing the bond markets can be traced to the easy availability of cash in recent years. How did this happen?
Here are a few key dominoes.
1. The Fed created a super low interest rate environment when it put rates next to zero in 2008.
2. Investors looking for more yield move away from safe assets like U.S. Treasury bonds and into higher-risk assets like bonds issued by lower-rated companies.
3. That makes it easier for low-rated companies to get cash at low rates from the capital markets.
Now, however, the tables are turning. The Fed is slowly starting to increase rates and investors’ appetite – and the cash available – for low-rated companies is on the decline. Add to that the gloomy outlook for the global economy and low commodity prices, and some companies may struggle to pay back what they borrowed.
My grandfather was never rich. He did have some money in the 1920s, but he lost most of it at the tail end of the decade. Some of it disappeared in the stock market crash in October of 1929. The rest of his deposits fell victim to the collapse of New York’s Bank of the United States in December of 1931. I wish I could say that my grandfather recovered from the wrath of the stock market disaster and subsequent bank failures. For the most part, however, living above the poverty line was about the best that he could do financially, as he buckled down to raise two children in Queens. There was one financial feature of my grandfather’s life that provided him with greater self-worth. Specifically, he refused to take on significant debt because he remained skeptical of credit. And with good reason.
The siren’s song of “you-can-pay-me-Tuesday-for-a-hamburger-today” only created an illusion of wealth in the Roaring Twenties; in fact, unchecked access to favorable borrowing terms as well as speculative excess in the use of debt contributed mightily to the country’s eventual descent into the Great Depression. G-Pops wanted no part of the next debt-fueled crisis. Here’s something few people know about the past: Consumer debt more than doubled during the ten year-period of the Roaring 1920s (1/1/1920-12/31/1929). And while you may often hear the debt apologist explain how the only thing that matters about debt is the ability to service it, the reckless dismissal ignores the reality of virtually all financial catastrophes.
During the Asian Currency Crisis and the bailout of Long-Term Capital Management (1997-1998), fast-growing emerging economies (e.g., South Korea, Malaysia, Thailand, etc.) experienced extraordinary capital inflows. Most of the inflows? Speculative borrowed dollars. When those economies showed signs of strain, “hot money” quickly shifted to outflows, depreciating local currencies and leaving over-leveraged hedge funds on the wrong side of currency trades. The Fed-orchestrated bailout of Long-Term Capital coupled with rate cutting activity prevented the 19% S&P 500 declines and 35% NASDAQ depreciation from charting a full-fledged stock bear. Did we see similar debt-fueled excess leading into the 2000-2002 S&P 500 bear (50%-plus)? Absolutely. How long could margin debt extremes prosper in the so-called New-Economy?
How many dot-com day-traders would find themselves destitute toward the end of the tech bubble? Bring it forward to 2007-2009 when housing prices began to plummet in earnest. How many “no-doc” loans and “negative am” mortgages came with a promise of real estate riches? Instead, subprime credit abuse brought down the households that lied to get their loans, destroyed the financial institutions that had these “toxic assets” on their books, and overwhelmed the government’s ability to manage the inevitable reversal of fortune in stocks and the overall economy. Just like 1929-1932. Just like 1997-1998. Just like 2000-2002.
First, China’s property bubble popped. Then, China’s stock market bubble burst over the summer, and investors lost a ton of money before the government took control of the system. Now the concern floating around the world of markets is that the third in China’s “triple bubble” is about to burst. That bubble is credit, especially corporate bonds, which have absolutely exploded over the past year as refugees from the other bubble bursts searched for yield. This one is going to be for a very straightforward reason, too — supply. Simply put, there are about to be too many bonds in China, and that could ultimately harm the weakest part of the Chinese economy, the debt-loaded zombie companies that helped form the property bubble and are now unable to turn a healthy profit.
Here’s how all of this happened. When the Chinese stock market went careening downward last summer, a ton of the money that was invested in the market ran into the credit market, specifically corporate bonds. “In our view, China is in the midst of a triple bubble, with the third-biggest credit bubble of all time, the largest investment bubble (proxied by the investment share of GDP) and the second-biggest real-estate bubble,” Credit Suisse analyst Andrew Garthwaite wrote in a note back in July. This was great for China’s debt-laden corporates. They could keep running on easy credit because demand was so high. Corporate-bond issuance increased 21% from 2014 to 2015, and by the end of last year their total stock made up 21.6% of GDP, as opposed 18.4% the year before, according to Societe Generale.
Chinese Treasury-bond supply is set to increase too, from 936 billion yuan in 2015 to 1.4 trillion yuan in 2016. At the same time, the government has been getting a move on an important project it has been working on for some time — turning local-government debt from the country’s infrastructure boom into a real municipal-bond market. We’re talking a lot of money here. In March alone the government allowed 1 trillion yuan ($160 billion) of local-government debt to be converted into local-government bonds (LGB). In 2016 analysts expect the government to issue another 6 trillion yuan in LGBs. That’s a lot of bonds.
Bad loans are likely to outnumber good ones soon in the U.S. oil patch, an indication of the pressure on energy companies and their lenders from the crash in prices. The number of energy loans labeled as “classified,” or in danger of default, is on course to extend above 50% this year at several major banks, including Wells Fargo and Comerica, according to bankers and others in the industry. In response, several major banks are reducing their exposure to the energy sector by attempting to sell off souring loans, declining to renew them or clamping down on the ability of oil and gas companies to tap credit lines for cash, according to more than a dozen bankers, lawyers and others familiar with the plans.
The pullback is curtailing the flow of money to companies struggling to survive a prolonged stretch of low prices, likely quickening the path to bankruptcy for some firms. 51 North American oil-and-gas producers have already filed for bankruptcy since the start of 2015, cases totaling $17.4 billion in cumulative debt, according to law firm Haynes and Boone. That trails the number from September 2008 to December 2009 during the global financial crisis, when there were 62 filings, but is expected to grow: About 175 companies are at high risk of not being able to meet loan covenants, according to Deloitte. “This has the makings of a gigantic funding crisis” for energy companies, said William Snyder, head of Deloitte’s U.S. restructuring unit. If oil prices, which closed at $39.79 a barrel Wednesday, remain at around $40 a barrel this year, “that’s fairly catastrophic.”
As Britain ponders its future in the EU, investors are betting an amount almost the size of Iceland’s economy on the pound falling to levels last seen in the 1980s. At least 11 billion pounds ($16 billion) has been wagered this year on options that would profit if sterling fell to or below $1.3502, a 4.5% drop from current levels, after the June 23 referendum. More than half of the positions were placed since the date of the vote was set on Feb. 20. The figures give an indication of what’s at stake as investors weigh the possibility of the U.K. quitting the world’s largest single market, which accounts for about half its imports and exports. Even with opinion polls showing no clear lead for either side, the prospect of a “Brexit” has seen the pound fall more than any other major currency versus the dollar this year.
“There is a risk premium in sterling, both in terms of the spot rate and in terms of the volatility market, but this is one of those events where you have no way of calibrating how big it should be,” said Paul Meggyesi at JPMorgan Chase in London. “Few investors believe that sterling has fallen to levels where the risk-reward favors buying.” While tumbling to $1.3502 would barely exceed the pound’s decline so far this year, it would take the U.K. currency to the lowest level since 1985. Traders assign 54% odds to sterling reaching that level by the day of the referendum, according to Bloomberg’s options calculator. Meggyesi sees the pound falling to $1.38 by mid-year, from $1.4145 as of 4:45 p.m. London time on Thursday. Even forecasts of a drop to these levels may be optimistic if the U.K. actually ends up leaving the EU.
PBOC fixed the Yuan at its weakest in 3 weeks, pushing the devaluation streak to its longest since early January. However, Offshore Yuan has now dropped over 1.1% against the USD, extending losses for the 6th straight day to 3-week lows. This is the longest streak of weakness in the offshore Yuan since April 2014.
It appears EUR and JPY took enough pain so the basket is reverting to the USD again…
What’s the opposite of passive-aggressive as a clear message is being sent to The Fed – tighten and we unleash the Yuan-weakness-driven turmoil…
Think there’s a housing affordability crisis in Britain, with low mortgage rates likely to drive house prices even higher? Take a look at Sweden where lending policies have been more generous, and where house price inflation has been (at least recently) more extreme. A number of banks and analysts have warned that Sweden’s housing market is overheating, with HSBC in January saying: “The pace of acceleration in the housing market points to a bubble.” House prices across the country were up 18pc last year. This compares to Britain’s house price rises in 2015 of between 5pc and 10pc, depending on which index is used. Now Sweden is dealing with its overheated housing market by reining in mortgage availability.
Regulators introduced restrictions which will mean mortgage terms – the time homebuyers have to clear the debt – will be drastically reduced to just… 105 years. The move comes because historically there has been no time limit on mortgage duration. So as prices rose and affordability became tougher, Swedish banks’ response was to extend terms, as had been the case in other high-cost property markets including Japan in the Eighties. The average term is reported to be 140 years. This meant many people who inherited property but who could not afford to take on the mortgage debt had to sell up. Swedish banks were quoted in the local press as opposing the move.
“It isn’t good for the finances of households as it will make mortgages more expensive and the terms not as good. And it isn’t good for financial stability,” the head of Swedish Bankers’ Association was reported to say. In Britain, there has been a move by some lenders to increase mortgage terms but only for younger borrowers. Even then, the maximum term tends to be 35 years, although some lenders – including Halifax and Nationwide – go up to 40, brokers say. The Mortgage Market Review introduced by British regulators in 2013 made it difficult for lenders to arrange loans which went into borrowers’ likely retirement.
House prices in Shenzhen, the city which is a hub for technology hardware and known as China’s Silicon Valley, soared by almost 50% last year – the fastest growth in residential property prices worldwide. A new survey puts two Chinese cities – Shenzhen and Shanghai – in the top five fastest-growing property markets despite the Chinese stock market tumbling in 2015. The research, by the estate agents Knight Frank (pdf), also shows the impact of last year’s debt crisis in Greece. House prices in the two biggest Greek cities – Thessaloniki and Athens – were both ranked among the worst six in the survey of 165 cities, falling 5.9% and 4.8% respectively. There were also significant drops in some Italian cities, including Rome, Trieste and Genoa. Nicosia and Larnaca in Cyprus were also among the worst performers.
The Global Residential Cities Index showed that house prices in cities worldwide went up 4.4%. Behind Shenzhen, Auckland was the second fastest growing market with rises of 25.4%, followed by Istanbul (25%) and Sydney (19.9%). Shenzhen has become a hub for the production of hardware used in electronics and has a permanent population of 10 million, rising to 15 million in the summer – autumn electronics season. Their average age is 30. The city bordering Hong Kong did not exist 30 years ago, sporting just a few fishing villages. In 1979, it was declared China’s first special economic zone and surrounded by an 85-mile long, barbed wire fence. Investment and migrant workers flooded the area and factories and housing were built from scratch. By the mid-90s, the population had climbed to 3 million.
In 2004, the first metro station opened and a decade later the network had grown to 131 stations. Two Turkish cities featured in the top 10 – Istanbul and Izmir – while Budapest recorded the biggest rise among European Union cities, with prices up 16.3%. Budapest is also the strongest performing capital city in the index, with demand fuelled by an investment immigration bond for Chinese nationals. Cities traditionally associated with high prices failed to feature prominently. London was ranked at 16 (11.4% growth) with New York at 89th (3.3%). The fast rising prices of Sydney, the fourth fastest rising market, has resulted in high rents and the same sort of concerns about the effects on the young population in the city as in London. In the US, Portland in Oregon and San Francisco were the highest risers, both with increases over the year of 10%. The fastest growing North American city was Vancouver, with prices up nearly 12% on an annual basis.
Despite all the government talk about the nonperforming loans secured by borrowers’ homes being protected from falling into the hands of hedge funds, the latest recapitalization process has resulted in the entire credit sector now being controlled by foreign investors – hedge funds no less. Those foreign firms, the majority of which control high-risk portfolios, hold stakes of more than 50% in all of Greece’s systemic lenders, and in some cases far above that. Therefore, by extension, they control a loan portfolio which exceeds 200 billion euros and includes performing loans amounting to some 100 billion and bad loans that also add up to around 100 billion, and there is currently a negotiations battle under way for them not to be sold on to others.
It makes no difference to borrowers who owns their loans; it is the general legal framework and the legal moves they can make in case they are unable to fulfill their obligations that matter. The banks’ planning does not provide for the sale of bad loans, and there are strong indications that the existing stock of NPLs includes many strategic defaulters who have taken advantage of the crisis to avoid fulfilling their obligations. The Bank of Greece estimates that they account for 20% of all bad loans.
The National Review, a conservative magazine for the Republican elite, recently unleashed an attack on the “white working class”, who they see as the core of Trump’s support. The first essay, Father Führer, was written by the National Review’s Kevin Williamson, who used his past reporting from places such as Appalachia and the Rust Belt to dissect what he calls “downscale communities”. He describes them as filled with welfare dependency, drug and alcohol addiction, and family anarchy – and then proclaims: “Nothing happened to them. There wasn’t some awful disaster, There wasn’t a war or a famine or a plague or a foreign occupation. … The truth about these dysfunctional, downscale communities is that they deserve to die. Economically, they are negative assets. Morally, they are indefensible. The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles.”
A few days later, another columnist, David French, added: “Simply put, [white working class] Americans are killing themselves and destroying their families at an alarming rate. No one is making them do it. The economy isn’t putting a bottle in their hand. Immigrants aren’t making them cheat on their wives or snort OxyContin.” Both suggested the answer to their problems is they need to move. “They need real opportunity, which means that they need real change, which means that they need U-Haul.” Downscale communities are everywhere in America, not just limited to Appalachia and the Rust Belt – it’s where I have spent much of the past five years documenting poverty and addiction. To say that “nothing happened to them” is stunningly wrong. Over the past 35 years the working class has been devalued, the result of an economic version of the Hunger Games.
It has pitted everyone against each other, regardless of where they started. Some contestants, such as business owners, were equipped with the fanciest weapons. The working class only had their hands. They lost and have been left to deal on their own. The consequences can be seen in nearly every town and rural county and aren’t confined to the industrial north or the hills of Kentucky either. My home town in Florida, a small town built around two orange juice factories, lost its first factory in 1985 and its last in 2005. [..] Over the past 35 years, except for the very wealthy, incomes have stagnated, with more people looking for fewer jobs. Jobs for those who work with their hands, manufacturing employment, has been the hardest hit, falling from 18m in the late 1980s to 12m now.
The economic devaluation has been made more painful by the fraying of the social safety net, and more visceral by the vast increase at the top. It is one thing to be spinning your wheels stuck in the mud, but it is even more demeaning to watch as others zoom by on well-paved roads, none offering help. It is not just about economic issues and jobs. Culturally, we are witnessing a tale of two Americas that are growing more distinct by the day.
A total of 20 people have been detained in China following the publication of a letter calling on President Xi Jinping to resign, the BBC has learned. The letter was posted earlier this month on a state-backed website Wujie News. Although quickly deleted by the authorities, a cached version can still be found online. In most countries the contents of the letter would be run-of-the-mill political polemic. “Dear Comrade Xi Jinping, we are loyal Communist Party members,” it begins, and then cuts to the chase. “We write this letter asking you to resign from all party and state leadership positions.” But in China, of course, and in particular on a website with official links, this kind of thing is unheard of and there have already been signs of a stern response by the authorities. The detention of a prominent columnist, Jia Jia, was widely reported to be in connection with the letter.
Friends say he simply called the editor of Wujie to enquire about it after seeing it on line. But now the BBC has spoken to a staff member at Wujie who has asked to remain anonymous and who has told us that in addition to Jia Jia another 16 people have been “taken away”. The source said they included six colleagues who work directly for the website, including a senior manager and a senior editor, and another 10 people who work for a related technology company. And a well-know Chinese dissident living in the US said three members of his family, living in China’s Guangdong Province, had also been detained in connection with the letter. Wen Yunchao said he believed his parents and his brother had been detained because authorities were trying to pressure him to reveal information. But he told the BBC that he knew nothing about the letter.
The letter focuses its anger on what it says is President Xi’s “gathering of all power” in his own hands, and it accuses him of major economic and diplomatic miscalculations, as well as “stunning the country” by placing further restrictions on freedom of speech. The latter is a reference to Mr Xi’s high profile visit last month to state-run TV and newspaper offices, where he told journalists that their primary duty was to obey the Communist Party. The letter first appeared on an overseas-based Chinese language website, well outside the realm of Communist Party censors, but the big question is how it then made its way onto Wujie. The idea that any Chinese editor of sane mind would knowingly publish such a document seems so unlikely that there has been speculation amongst some Chinese journalists, in private, that Wujie was either hacked, or had perhaps been using some kind of automatic trawling and publishing software.
One of two prominent Turkish journalists facing life in prison on charges of espionage vowed to make the trial, which begins on Friday, a prosecution of official wrongdoing. Can Dundar, editor-in-chief of Cumhuriyet, told Reuters he would use his trial, which has drawn international condemnation, to refocus attention on the story that landed him in the dock. Dundar, 54, and Erdem Gul, 49, Cumhuriyet’s Ankara bureau chief, stand accused of trying to topple the government over the publication last May of video purporting to show Turkey’s state intelligence agency helping to truck weapons to Syria in 2014. “We are not defendants, we are witnesses,” Dundar said in an interview at his office, promising to show the footage in court despite a ban and at the risk that judges may order the hearings to be held behind closed doors.
“We will lay out all of the illegalities and make this a political prosecution … The state was caught in a criminal act, and it is doing all that it can to cover it up.” Dundar and Gul spent 92 days in jail, almost half of it in solitary confinement, before the constitutional court ruled last month that pre-trial detention was unfounded because the charges stemmed from their journalism. Both were subsequently released pending trial, although President Tayyip Erdogan said he did not respect the ruling. Erdogan has acknowledged that the trucks, which were stopped by gendarmerie and police officers en route to the Syrian border, belonged to the MIT intelligence agency and said they were carrying aid to Turkmens in Syria. Turkmen fighters are battling both President Bashar al-Assad’s forces and Islamic State.
Erdogan has said prosecutors had no authority to order the trucks be searched and that they acted as part of a plot to discredit the government, allegations the prosecutors denied. Erdogan has cast the newspaper’s coverage as part of an attempt to undermine Turkey’s global standing and has vowed Dundar would “pay a heavy price.” The trial comes as Turkey deflects criticism from the European Union and rights groups that it is bridling a once vibrant press. “We were arrested for two reasons: to punish us and to frighten others. And we see the intimidation has been effective. Fear dominates,” Dundar said.
We now know that greenhouse gases are rising faster than at any time since the demise of dinosaurs, and possibly even earlier. According to research published in Nature Geoscience this week, carbon dioxide (CO2 ) is being added to the atmosphere at least ten times faster than during a major warming event about 50 million years ago. We have emitted almost 600 billion tonnes of carbon since the beginning of the Industrial Revolution, and atmospheric COC concentrations are now increasing at a rate of 3 parts per million (ppm) per year. With increasing CO2 levels, temperatures and ocean acidification also rise, and it is an open question how ecosystems are going to cope under such rapid change. Coral reefs, our canary in the coal mine, suggest that the present rate of climate change is too fast for many species to adapt: the next widespread extinction event might have already started.
In the past, rapid increases in greenhouse gases have been associated with mass extinctions. It is therefore important to understand how unusual the current rate of atmospheric CO2 increase is with respect to past climate variability. There is no doubt that atmospheric COC concentrations and global temperatures have changed in the past. Ice sheets, for example, are reliable book-keepers of ancient climate and can give us an insight into climate conditions long before the thermometer was invented. By drilling holes into ice sheets we can retrieve ice cores and analyse the accumulation of ancient snow, layer upon layer. These ice cores not only record atmospheric temperatures through time, they also contain frozen bubbles that provide us with small samples of ancient air. Our longest ice core extends more than 800,000 years into the past.
During this time, the Earth oscillated between cold ice ages and warm interglacials . To move from an ice age to an interglacial, you need to increase COC by roughly 100 ppm. This increase repeatedly melted several kilometre-thick ice sheets that covered the locations of modern cities like Toronto, Boston, Chicago or Montreal. With increasing COC levels at the end of the last ice age, temperatures increased too. Some ecosystems could not keep up with the rate of change, resulting in several megafaunal extinctions, although human impacts were almost certainly part of the story. Nevertheless, the rate of change in COC over the past million years was tame when compared to today. The highest recorded rate of change before the Industrial Revolution is less than 0.15 ppm per year, just one-twentieth of what we are experiencing today.
James Hansen’s name looms large over any history that will likely be written about climate change. Whether you look at the hard science, the perils of political interference or modern day activism, Dr Hansen is there as a central character. In a 1988 US Senate hearing, Hansen famously declared that the “greenhouse effect has been detected and is changing our climate now”. Towards the end of his time as the director of NASA’s Goddard Institute for Space Studies, Hansen described how government officials had on other occasions changed his testimony, filtered scientific findings and controlled what scientists could and couldn’t say to the media – all to underplay the impact of fossil fuel emissions on the climate. In recent years, the so-called “grandfather of climate science” has added to his CV the roles of author and twice-arrested climate activist and anti-coal campaigner. He still holds a position at Columbia University.
So when Hansen’s latest piece of blockbuster climate research was finalized and released earlier this week, there was understandable global interest, not least because it mapped a potential path to the “loss of all coastal cities” from rising sea levels and the onset of “super storms” previously unseen in the modern era. So what is Hansen claiming? Well, the first thing to understand is that Hansen’s paper, written with 18 other co-authors, many of them highly-reputable names in climate science in their own right, is far from conventional. Most scientific papers only take up four or five pages in a journal. Hansen’s paper – in the journal Atmospheric Chemistry and Physics – grabs 52 pages (although it’s hard to quibble over space when you’re laying out a possible path to widespread global disruption and the complete reshaping of coastlines).
Nor was the paper published in a conventional way. If you’re getting a faint sense of déjà vu about Hansen’s findings, then that could be down to how a draft version of the study was published and widely covered in July last year. The journal runs an unconventional interactive system of peer review where comments and criticisms from other scientists are published for everyone to see, as are the responses from Hansen and his colleagues. This is arguably a more transparent way of conducting the scientific process of peer review – something usually carried out privately and anonymously. None of this should really detract from Hansen and his co-author’s central claims. Firstly, Hansen says they may have uncovered a mechanism in the Earth’s climate system not previously understood that could point to a much more rapid rise in sea levels. When the Earth’s ice sheets melt, they place a freshwater lens over neighboring oceans.
This lens, argues Hansen, causes the ocean to retain extra heat, which then goes to melting the underside of large ice sheets that fringe the ocean, causing them to add more freshwater to the lens (this is what’s known as a “positive feedback” and is not to be confused with the sort of positive feedback you may have got at school for that cracking fifth grade science assignment). Secondly, according to the paper, all this added water could first slow and then shut down two key ocean currents – and Hansen points to two unusually cold blobs of ocean water off Greenland and off Antarctica as evidence that this process may already be starting. If these ocean conveyors were to be impacted, this could create much greater temperature differences between the tropics and the north Atlantic, driving “super storms stronger than any in modern times”, he argues. “All hell will break loose in the North Atlantic and neighbouring lands,” he says in a video summary.
The government said Thursday it will fast-track procedures to create new centers to accommodate 30,000 people within the next 20 days as it finds itself in a race against time to meet an obligation to provide shelter to more than 50,000 asylum seekers stranded in the country, and to prevent an imminent humanitarian disaster. The current capacity of shelters is 38,000. The decision came after a meeting of the government’s council of ministers, chaired by Prime Minister Alexis Tsipras, amid a growing sense of urgency surrounding camps around the country and the increasing realization that the existing infrastructure simply cannot cope with the huge refugee numbers. It also follows the worsening toll on migrants’ health after the withdrawal on Wednesday of aid agencies from camps in Greece to protest the recent EU-Turkey deal – which was activated last Sunday – to stem refugee inflows to Europe, which, they say, contravenes international law.
At the same time, the spokesman of the coordinating committee for refugees, Giorgos Kyritsis, said legislation facilitating the implementation of the EU deal will be tabled in Parliament on Wednesday. The government also said it will further empower the Immigration Policy Ministry to deal with increased obligations implicit in the deal, while temporary staff will also be enlisted. Kyritsis also announced the creation of a monitoring mechanism under the general secretary of the Defense Ministry, Yiannis Tafyllis. The government’s immediate priority, Kyritsis said, will be to provide relief to the sprawling and overcrowded border camp of Idomeni in northern Greece. He added that transport means will be made available over the next few days to transfer refugees to other centers affording more humane conditions.
The mayor of the nearby town of Paionia, Christos Goudenoudis, is calling for the camp’s immediate evacuation as the local community, he said, is feeling increasingly insecure as crime in the area has proliferated. Meanwhile the latest figures suggest a marked decrease in refugee flows into the country over the last few days, while none arrived Thursday – for the first time since the deal between the European Union and Turkey was struck. Authorities, however, have attributed this mostly to bad weather. On Tuesday, inflows were limited to 260 – a significant decrease from the several thousand a couple of weeks ago.
The essence, as Steve Keen keeps saying, is that negative rates on reserves are madness, because banks can’t lend out their reserves. Something central bankers genuinely don’t seem to grasp, weird as that may seem. Which speaks volumes, and shines a very bleak light, on the field of economics.
The Japanese central bank has only dug the country deeper into a hole by adopting negative interest rates, Lindsey Group chief market analyst Peter Boockvar said Friday. “I think it’s economic kamikaze,” he told CNBC’s “Squawk Box.” “Let’s tax money and hope things get better. Let’s create higher inflation for the Japanese people, who are barely seeing wage growth. And let’s amp up the currency battles, and hope everything gets better.” The Bank of Japan surprised markets on Friday by pushing interest rates into negative territory for the first time ever. By doing so, the BOJ is essentially charging banks for parking excess funds. The fact that the vote was split shows that BOJ Governor Haruhiko Kuroda got a lot of pushback to advance the policy, Boockvar said. “If this means now that they’re out of bullets with [QE], and this is their last hope, then I think this is a mess,” he said.
In a statement released along with the rate decision, the BOJ said the Japanese economy has recovered modestly with underlying inflation and spending by companies and households ticking up. But the bank warned that increasing uncertainty in emerging markets and commodity-exporting countries may delay an improvement in Japanese business confidence and negatively affect the current inflation trend. The BOJ’s inflation target is 2%. The BOJ now forecasts core inflation to average 0.2 to 1.2% between April 2016 and March 2017. Boockvar said he believes it’s a fallacy that Japan needs inflation to generate growth. “Inflation readings are a symptom of what underlying growth is,” Boockvar said. “For Kuroda to think ‘I need to generate higher inflation to generate growth’ to me is completely backwards, especially when Japanese wage growth is so anemic. You’re basically penalizing the Japanese consumer, and I don’t know what economic theory is behind that.”
When stripping away all the philosophy, the pompous rhetoric, and the jawboning, all central banks do, or are supposed to do, is to influence capital allocations and spending behavior by adjusting the liquidity preference of the population by adjusting interest rates and thus the demand for money. To be sure, over the past 7 years central banks around the globe have gone absolutely overboard when it comes to their primary directive and have engaged every possible legal (and in the case of Europe, illegal) policy at their disposal to force consumers away from a “saving” mindset, and into purchasing risk(free) assets or otherwise burning through savings in hopes of stimulating inflation. Today’s action by the Bank of Japan, which is meant to force banks, and consumers, to spend their cash which will now carry a penalty of -0.1% if “inert” was proof of just that.
Ironically, and perversely from a classical economic standpoint, as we showed before in the case of Europe’s NIRP bastions, Denmark, Sweden, and Switzerland, the more negative rates are, the higher the amount of household savings! This is what Bank of America said back in October: “Yet, household savings rates have also risen. For Switzerland and Sweden this appears to have happened at the tail end of 2013 (before the oil price decline). As the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.” Bingo: that is precisely the fatal flaw in all central planning models, one which not a single tenured economist appears capable of grasping yet which even a child could easily understand.
[..] And here is the one chart which in our opinion virtually assures that the Fed will follow in the footsteps of Sweden, Denmark, Europe, Switzerland and now Japan. Since the middle of 2015, US investors have bought a big fat net zero of either bonds or equities (in fact, they have been net sellers of risk) and have parked all incremental cash in money-market funds instead, precisely the inert non-investment that is almost as hated by central banks as gold.
As we often stress, economics is a social science and therefore simply does not work like physics or other natural sciences. Only economic theory can explain economic laws – while economic history can only be properly interpreted with the aid of sound theory. Here is how we see it: If the authorities had left well enough alone after Hoover’s depression had bottomed out, the economy would have recovered quite nicely on its own. Instead, they decided to intervene all-out. The result was yet another artificial inflationary boom. By 1937 the Fed finally began to worry a bit about the growing risk of run-away inflation, so it took a baby step to make its policy slightly less accommodative.
Once the artificial support propping up an inflationary boom is removed, the underlying economic reality is unmasked. The cause of the 1937 bust was not the Fed’s small step toward tightening. Capital had been malinvested and consumed in the preceding boom, a fact which the bust revealed. Note also that a huge inflow of gold from Europe in the wake of Hitler’s rise to power boosted liquidity in the US enormously in 1935-36, with no offsetting actions taken by the Fed. Moreover, the Supreme Court had just affirmed the legality of several of the worst economic interventions of the crypto-socialist FDR administration, which inter alia led to a collapse in labor productivity as the power of unions was vastly increased, as Jonathan Finegold Catalan points out.
He also notes that bank credit only began to contract after the stock market collapse was already well underway – in other words, the Fed’s tiny hike in the minimum reserve requirement by itself didn’t have any noteworthy effect. On the other hand, if the Fed had implemented the Bernanke doctrine in 1937 and had continued to implement monetary pumping at full blast in order to extend the boom, it would only have succeeded in structurally undermining the economy and currency even more. Inevitably, an even worse bust would eventually have followed.
Central banks around the world are going to new lengths to boost their economies, underscoring both the importance and limits of monetary policy in a global economy plagued by paltry growth and unsettled markets. The Bank of Japan on Friday joined a host of European peers in setting its key short-term interest rate below zero. The move, long denied as a possible course by the bank s governor, came a week after the ECB president indicated he was ready to launch additional monetary stimulus in March and days after the Fed expressed new worries over market turbulence and sluggish growth overseas. The latest moves by central banks to rescue the global economy capped a volatile month across financial markets, with U.S. stocks finishing strong Friday but nonetheless posting their worst January since 2009, and major currencies lurching lower against the dollar.
The swings highlighted the fragile mood of investors despite hopes that some economies, particularly the U.S., could lead an exit from crisis-era policies. Fresh data Friday that showed the U.S. economy had sputtered in the final months of 2015 could cloud Fed deliberations over the timing of another round of rate increases. U.S. GDP, the broadest measure of economic output, grew by just 0.7% in the fourth quarter, hit hard by shrinking exports and business investment. Despite growth in consumer spending and clear strength in the job market, the weak performance added to concerns that the sagging global economy could hit the U.S.
Markets around the world were buoyed by Japan s move, extending the earlier assurances delivered by the ECB. Japan s Nikkei Stock Average closed up 2.8% in a volatile session, while the yield on Japanese government bonds fell to historically low levels. The Shanghai Composite Index jumped 3.1% and the Stoxx Europe 600 rose 2.2%. U.S. stocks also rose, with the Dow Jones Industrial Average climbing nearly 400 points. Despite the day s surge, some investors remained skeptical about the lasting impact of the central banks efforts. People are starting to feel more and more that central bank action is having less and less fire for effect, said Ian Winer, head of equities at Wedbush Securities.
Thanks to BoJ’s global “float all boats” NIRP-tard-ness, Chinese stocks avoided the headline of “worst month in 21 years” by rallying above the crucial 2,667 level (for SHCOMP). However, January’s 23% plunge is the worst month since October 2008 and is officially the worst start to a year in the history of Chinese stocks. While Shanghia Composite was ugly, the higher beta Shenzhen and ChiNext indices were a disaster…
It’s the biggest question in the world of finance: how fast is China’s economy growing? And the biggest frustration is: what are the actual numbers? China’s lack of transparency – with murky data releases, opaque policy making and confusing announcements – is notorious among emerging-market watchers. But rarely do research firms or analysts use different figures to the official statistics. Until recently. The Conference Board, a widely respected and often-cited non-profit research group, used an alternate series of Chinese GDP estimates in its latest economic outlook paper. In an effort to adjust for overstated official Chinese data, the Conference Board looked to the work of Harry Wu, an economist at the Institute of Economic Research, Hitotsubashi University in Tokyo, to adjust its calculations.
This was a footnote of the report: “Growth rates of Chinese industrial GDP are adjusted for mis-reporting bias and non-material services GDP are adjusted for biases in price deflators. This adjustment has important implications for our assessment of the growth rate of the global economy in general and that of the emerging markets in particular – both reflecting a downward adjustment in their recent growth rates.” Macquarie Wealth Management analysts picked up on the change, adding: “We are unaware of any other reputable agency adopting anything other than official numbers as a base case, although clearly there has always been a lot of scenario analysis.” Traditionally, China has used the Soviet system of collecting information through a chain of command, where local officials reported on their states, often misrepresenting their figures to meet designated targets.
Over the past 10 years, China has gradually moved towards the internationally recognised System of National Accounts, which relies on statistical surveys to discover what people are spending their money on and where. But as Macquarie points out, that transition is far from complete. The Wu-Maddison estimates are starkly different to those issued by Chinese authorities. Whereas Chinese authorities have claimed average GDP growth of about 7.7% for the past five years, Wu suggests it is much lower, about 4%. These new figures show a much higher degree of volatility than suggested by the official numbers. While the world frets about the possibility of a “hard landing” for the Chinese economy, the Conference Board observed the new estimates “suggest that the economy has already experienced a significant slowdown over the past four years, beginning in 2011.”
Macquarie echoes this sentiment. “In our view, Wu-Maddison numbers explain the current state of commodity markets and fit into the global deflationary narrative much better than official numbers,” the analysts Macquarie said in a note. But, as the bank points out, if the “hard landing” has already occurred, there will be a range of consequences for productivity growth, overcapacity absorption and financial stress. “If Wu estimates are right, the room for stimulus and investment is more limited and the need to drive productivity [structural reforms] much more urgent. Although by the time China retroactively adjusts its GDP, it would be treated as history. “In the absence of stronger productivity rebound, China would be in danger of getting stuck in the ‘middle-income trap’ and would be unable to inject incremental demand into the global economy. Stay safe.”
China’s leaders are expected to target economic growth in a range of 6.5% to 7% this year, sources familiar with their thinking said, setting a range for the first time because policymakers are uncertain on the economy’s prospects. The proposed range, which would follow a 2015 target of “around 7%” growth, was endorsed by top leaders at the closed-door Central Economic Work Conference in mid-December, according to the sources with knowledge of the meeting outcome. The world’s second-largest economy grew 6.9% in 2015, the weakest in 25 years, although some economists believe real growth is even lower. “They are likely to target economic growth of 6.5-7% this year, with 6.5% as the bottom line,” said one of the sources, a policy adviser.
Policymakers, worried by global uncertainties and the impact on growth of their structural economic reforms, struggled to reach a consensus at the December meeting, the sources said. The State Council Information Office, the public relations arm of the government, had no comment on the growth forecast when contacted by Reuters. The floor of 6.5% reflects the minimum average rate of growth needed over the next five years to meet an existing goal of doubling gross domestic product and per capita income by 2020 from 2010. The 2016 growth target and the country’s 13th Five-Year Plan, a blueprint covering 2016-2020, will be announced at the annual meeting of the National People’s Congress, the country’s parliament, in early March.
Although the target range was endorsed by the leadership in December, it could still be adjusted before parliament convenes. “The government will not be too nervous about growth this year and will focus more on structural adjustments,” said a government economist. “Growth may still slow in the first and second quarter and people are divided over the third and fourth quarter. The full-year growth could slow to 6.5-6.6%.” A string of cuts in interest rates and bank reserve requirements since November 2014 have failed to put a floor under the slowing economy. Beijing is expected to put more emphasis on fiscal policy to support growth, including tax cuts and running a bigger budget deficit of about 3% of GDP.
China’s leaders have flagged a “new normal” of slower growth as they look to shift the economy to a more sustainable, consumption-led model. About half of China’s 30 provinces and municipalities have lowered their growth targets for 2016, while nearly a third kept targets unchanged from last year, according to local media. Guangdong and Zhejiang provinces have set a growth target of 7-7.5% this year, while Jiangsu and Shandong are aiming for growth of 7.5-8%. In 2015, growth in Chongqing municipality was 11%, the fastest in the country, while growth in Liaoning province in the rustbelt northeast, was 3%, the country’s lowest. For this year, Chongqing is eyeing 10% growth and Liaoning is aiming for 6%.
The U.S. high-yield, or “junk” bond market, has started the year on the back foot, which history suggests could be a very bad sign for the stock market. The asset class is showing negative returns of almost 2% for the year so far, and negative returns of 7.6% for the last six months, according to The Bank of America Merrill Lynch U.S. High Yield Index. The negative return is especially significant, given that the month of January has recorded positive returns in 25 of the 29 years that the BofA high-yield index has existed, or 86.2% of the time, according to Marty Fridson, chief Investment Officer–Lehmann Livian Fridson, in a report published in LCD. With the S&P 500 index also heading for the biggest monthly decline in nearly six years, stock investors may finally be catching on to the high-yield bond market’s bearish message.
In previous instances in which the high-yield bond market and stocks trended in a different direction, it was the high-yield bond market that proved prescient. The reason stocks have been so late to follow the high-yield market’s bearish trend, may be because of the Federal Reserve’s efforts to prop up asset prices through quantitative easing. The current bearish trend is showing no signs of letting up. The high-yield index’s option-adjusted spread widened to 775 basis points at Thursday’s close from 695 basis points at the end of December, and 526 basis points at the end of July. The OAS is now about 200 basis points wider than its historical average of 576 basis points, according to Fridson. Much of the weakness is still due to the troubled energy sector, which combined with slowing Chinese growth to spark a more than 100 basis-points widening of the BofA US High Yield Index’s option-adjusted spread in the first three weeks of January. That send the spread to a high of 820 basis points on Jan 20.
I owe almost my entire Wall Street career to the Clintons. I am not alone; most bankers owe their careers, and their wealth, to them. Over the last 25 years they – with the Clintons it is never just Bill or Hillary – implemented policies that placed Wall Street at the center of the Democratic economic agenda, turning it from a party against Wall Street to a party of Wall Street. That is why when I recently went to see Hillary Clinton campaign for president and speak about reforming Wall Street I was skeptical. What I heard hasn’t changed that skepticism. The policies she offers are mid-course corrections. In the Clintons’ world, Wall Street stays at the center, economically and politically. Given Wall Street’s power and influence, that is a dangerous place to leave them.
Salomon Brothers hired me in 1993, seven months after President Bill Clinton’s inauguration. Getting a job had been easy, Wall Street was booming from deregulation that had begun under Reagan and was continuing under Clinton. When Bill Clinton ran for office, he offered up him and Hillary (“Two for the price of one”) as New Democrats, embracing an image of being tough on crime, but not on business. Despite the campaign rhetoric, nobody on the trading floor I joined had voted for the Clintons or trusted them. Few traders on the floor were even Democrats, who as long as anyone could remember were Wall Street’s natural enemy. That view was summarized in the words of my boss: “Republicans let you make money and let you keep it. Democrats don’t let you make money, but if you do, they take it.”
Despite Wall Street’s reticence, key appointments were swinging their way. Robert Rubin, who had been CEO of Goldman Sachs, was appointed to a senior White House job as director of the National Economic Council. The Treasury Department was also being filled with banking friendly economists who saw the markets as a solution, not as a problem. The administration’s economic policy took shape as trickle down, Democratic style. They championed free trade, pushing Nafta. They reformed welfare, buying into the conservative view that poverty was about dependency, not about situation. They threw the old left a few bones, repealing prior tax cuts on the rich, but used the increased revenues mostly on Wall Street’s favorite issue: cutting the debt. Most importantly, when faced with their first financial crisis, they bailed out Wall Street.
That crisis came in January 1995, halfway through the administration’s first term. Mexico, after having boomed from the optimism surrounding Nafta, went bust. It was a huge embarrassment for the administration, given the push they had made for Nafta against a cynical Democratic party. Money was fleeing Mexico, and much of it was coming back through me and my firm. Selling investors’ Mexican bonds was my first job on Wall Street, and now they were trying to sell them back to us. But we hadn’t just sold Mexican bonds to clients, instead we did it using new derivatives product to get around regulatory issues and take advantages of tax rules, and lend the clients money. Given how aggressive we were, and how profitable it was for us, older traders kept expecting to be stopped by regulators from the new administration, but that didn’t happen.
When Mexico started to collapse, the shudders began. Initially our firm lost only tens of millions, a large loss but not catastrophic. The crisis however was worsening, and Mexico was headed towards a default, or closing its border to money flows. We stood to lose hundreds of millions, something we might not have survived. Other Wall Street firms were in worse shape, having done the trade in a much bigger size. The biggest was rumored to be Lehman, which stood to lose billions, a loss they couldn’t have survived. As the crisis unfolded, senior management traveled to DC as part of a group of bankers to meet with Treasury officials. They had hoped to meet with Rubin, who was now Treasury secretary. Instead they met with the undersecretary for international affairs who my boss described as: “Some young egghead academic who likes himself a lot and is wide eyed with a taste of power.” That egghead was Larry Summers who would succeed Rubin as Treasury Secretary.
To the surprise of Wall Street, the administration pushed for a $50bn global bail-out of Mexico, arguing that to not do so would devastate the US and world economy. Unmentioned was that it would have also devastated Wall Street banks.
Another week brings more new stories on the diesel-emission cheating scandal that threatens to dig Volkswagen deeper into a ditch of its own making. Following reports in German newspapers late last week suggesting that the “defeat device” software was an “open secret” in VW’s engine group, the company bit back yesterday. VW Group CEO Matthias Müller told reporters at a reception that the sources for the Sueddeutsche Zeitung report “have no idea about the whole matter.” Müller’s statement, as reported by Reuters, “casts doubt” on the newspaper’s report, which it said came from statements by a whistleblower cited in the company’s internal probe of the scandal. The CEO also suggested that the company would not release results of that probe, conducted by U.S. law firm Jones Day, any time before its annual shareholder meeting on April 21.
“Is it really so difficult to accept that we are obliged by stock market law to submit a report to the AGM on April 21,” asked Müller, “and that it is not possible for us to say anything beforehand?” VW Group’s powerful Board of Directors will hold their third meeting in three weeks on the affair this coming Wednesday. Despite PR fallout, VW Group’s German communications unit continues to allege that while the “defeat device” software in its TDI diesels violated U.S. laws, it was entirely legal in Europe. The majority of the 11 million affected vehicles were sold in European countries, helped by policies instituted by some national governments that gave financial advantages to diesel vehicles and their fuel.
In a statement to The New York Times, which published an article on the matter last week, the VW Group wrote that the software “is not a forbidden defeat device” under European rules. As the Times notes, that determination, “which was made by its board, runs counter to regulatory findings in Europe and the United States.” “German regulators said last month that VW did use an illegal defeat device,” the newspaper said, suggesting that the statement reflected VW’s legal approach to the affair. “While it promises to fix affected vehicles wherever they were sold,” it said, “it is prepared to admit wrongdoing only in the United States.” The VW view only underscores the loosely-regulated European emission testing rules, now the subject of a fight in the European Parliament.
Two issues are at stake. The first is the degree to which new and tougher testing rules continue to allow manufacturers to exceed existing emission limits The second is whether European Union authorities can, in some circumstances, overrule the testing bodies of individual countries -namely Germany- which enforce common EU limits within their own borders. And so the saga continues.
Swiss residents are to vote on a countrywide referendum about a radical plan to pay every single adult a guaranteed income of £425 a week (or £1,700 a month). The plan, proposed by a group of intellectuals, could make the country the first in the world to pay all of its citizens a monthly basic income regardless if they work or not. But the initiative has not gained much traction among politicians from left and right despite the fact that a referendum on it was approved by the federal government for the ballot box on June 5. Under the proposed initiative, each child would also receive 145 francs (£100) a week. The federal government estimates the cost of the proposal at 208 billion francs (£143 billion) a year.
Around 153 billion francs (£105 bn) would have to be levied from taxes, while 55 billion francs (£38 bn) would be transferred from social insurance and social assistance spending. The group proposing the initiative, which includes artists, writers and intellectuals, cited a survey which shows that the majority of Swiss residents would continue working if the guaranteed income proposal was approved. ‘The argument of opponents that a guaranteed income would reduce the incentive of people to work is therefore largely contradicted,’ it said in a statement quoted by The Local. However, a third of the 1,076 people interviewed for the survey by the Demoscope Institute believed that ‘others would stop working’. And more than half of those surveyed (56%) believe the guaranteed income proposal will never see the light of day.
Half a kilometre beneath the forests of northern Germany, in an old salt mine, a nightmare is playing out. A scheme to dig up previously buried nuclear waste is threatening to wreck public support for Germany’s efforts to make a safe transition to a non-nuclear future. Enough plutonium-bearing radioactive waste is stored here to fill 20 Olympic swimming pools. When engineers backfilled the chambers containing 126,000 drums in the 1970s, they thought they had put it out of harm’s way forever. But now, the walls of the Asse mine are collapsing and cracks forming, thanks to pressure from surrounding rocks. So the race is on to dig it all up before radioactive residues are flushed to the surface.
It could take decades to resolve. In the meantime, excavations needed to extract the drums could cause new collapses and make the problem worse. “There were people who said it wasn’t a good idea to put radioactive waste down here, but nobody listened to them,” says Annette Parlitz, spokeswoman for the Federal Office for Radiation Protection (BfS), as we tour the mine. This is just one part of Germany’s nuclear nightmare. The country is also wrestling a growing backlog of spent fuel. And it has to worry about vast volumes of radioactive rubble that will be created as all the country’s 17 nuclear plants are decommissioned by 2022 – a decision taken five years ago, in the aftermath of Japan’s Fukushima disaster. The final bill for decommissioning power plants and getting rid of the waste is estimated to be at least €36 billion.
Some 300,000 cubic metres of low and intermediate-level waste requiring long-term shielding, including what is dug from the Asse mine, is earmarked for final burial at the Konrad iron mine in Lower Saxony. What will happen to the high-level waste, the spent fuel and other highly radioactive waste that must be kept safe for up to a million years is still debated. Later this year, a Final Storage Commission of politicians and scientists will advise on criteria for choosing a site where deep burial or long-term storage should be under way by 2050. But its own chairman, veteran parliamentarian Michael Muller, says that timetable is unlikely to be met. “We all believe deep geology is the best option, but I’m not sure if there is enough [public] trust to get the job done,” he says.
More people died crossing the eastern Mediterranean in January than in the first eight months of last year, the International Organization for Migration said on Friday, blaming increased ruthlessness by people-traffickers. As of Jan. 28, 218 had died in the Aegean Sea – a tally not reached on the Greek route until mid-September in 2015. Another 26 died in the central Mediterranean trying to reach Italy. Smugglers were using smaller, less seaworthy boats, and packing them with even more people than before, the IOM said. IOM spokesman Joel Millman said the more reckless methods might be due to “panic in the market that this is not going to last much longer” as traffickers fear European governments may find ways to stem the unprecedented flow of migrants and refugees.
There also appeared to be new gangs controlling the trafficking trade in North Africa, he said. “There was a very pronounced period at the end of the year when boats were not leaving Libya and we heard from our sources in North Africa that it was because of inter-tribal or inter-gang fighting for control of the market,” Millman said. “And now that it’s picking up again and it seems to be more lethal, we wonder: what is the character of these groups that have taken over the trade?” The switch to smaller, more packed boats had also happened on the route from Turkey to Greece, the IOM said, but was unable to explain why.
The increase in deaths in January was not due to more traffic overall. The number of arrivals in Greece and Italy was the lowest for any month since June 2015, with a total of 55,528 people landing there between Jan. 1 and Jan. 28, the IOM said. Last year a record 1 million people made the Mediterranean Sea crossing, five times more than in 2014. During the year, the IOM estimates that 805 died in the eastern Mediterranean and 2,892 died in the central Mediterranean. In the past few months the proportion of children among those making the journey has risen from about a quarter to more than a third, and Millman said children often made up more than half of the occupants of the boats.