Dec 292018
 
 December 29, 2018  Posted by at 11:58 am Finance Tagged with: , , , , , , , ,  


Sandro Botticelli Portrait of a Young Woman 1480 – 1485

 

Can an Inverted Yield Curve CAUSE a Recession? (St. Louis Fed)
The Malaysia Scandal Is Starting to Look Dire for Goldman Sachs (Taibbi)
How Crazy This Week Was For The Stock Market, In One Big Chart (MW)
Record-Bad Year-End For $1.3-Trillion “Leveraged Loan” Market (WS)
US Debt Soars $1.4 Trillion From Last Christmas, $44,000 Per Second (RT)
US Home Sales Decline To Steepen, No Respite In Sight. (WS)
Which Side Are You On? (Jim Kunstler)
Universal Basic Income Is Easier Than It Looks (Ellen Brown)
Guilty By Innuendo: The Guardian Campaign Against Julian Assange (Canary)

 

 

The St. Louis Fed says yes.

Can an Inverted Yield Curve CAUSE a Recession? (St. Louis Fed)

An inverted yield curve—or a situation in which market yields on shorter-term U.S. Treasury securities exceed those on longer-term securities—has been a remarkably consistent predictor of economic recessions. However, simply because inversions forecast recessions does not necessarily mean that inversions cause recessions. Why might a yield curve inversion cause economic activity to slow?

Recently, the Federal Reserve asked banks how their lending policies might change in response to a hypothetical moderate inversion of the yield curve.1 Many of those surveyed indicated that they would tighten lending standards or price terms on every major loan category. When asked why they would do so, several potential reasons were given: • An inversion could cause loans to be less profitable relative to the bank’s cost of funds. • An inversion would cause their banks to be less risk tolerant. • An inversion may signal a less favorable or more uncertain economic outlook. The figure below illustrates the tendency of banks to tighten lending terms when the yield curve inverts. It plots the yield on 10-year Treasury securities minus the yield on two-year securities.

Normally, the yield on 10-year securities exceeds the yield on two-year securities, reflecting the fact that the yield curve is usually upward sloping. The yield curve is downward sloping (or inverted) when the yields on shorter-term securities are higher than those on longer-term securities, as in 2000 and 2006. Both of those inversions were followed by the start of a recession within a few months. The Fed has surveyed banks on their lending terms continuously since 1990. The chart shows that the net percentage of banks tightening their lending standards on commercial and industrial loans began to rise around the time that the yield curve inverted in 2000 and 2006.

Why is this important? Researchers have found that the economy tends to slow after banks tighten their lending standards, suggesting that an inversion of the yield curve could cause economic activity to slow by leading banks to reduce the supply of loans. Thus, an inverted yield curve might do more than predict a recession: It might actually cause one.

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“..like a massage price that suggests you’re probably getting more than a massage.”

The Malaysia Scandal Is Starting to Look Dire for Goldman Sachs (Taibbi)

Goldman Sachs, which has survived and thrived despite countless scandals over the years, may have finally stepped in a pile of trouble too deep to escape. There’s even a Donald Trump angle to this latest great financial mess, but the outlines of that subplot – in a case that has countless – remains vague. The bank itself is in the most immediate danger. The company’s stock rallied Thursday to close at 165, stopping a five-day slide in which the firm lost almost 12 percent of its market value. The company is down 35 percent for the year, most of that coming in the past three months as Goldman has been battered by headlines about the infamous 1MDB scandal.

Just before Christmas, Malaysian authorities filed criminal charges against Goldman, seeking a stunning $7.5 billion in reparations for the bank’s role in the scandal. Singapore authorities also announced they were expanding their own 1MDB probe to include Goldman. In the 1MDB scheme, actors tied to former Malaysian Prime Minister Najib Razak allegedly siphoned mountains of cash out of a state investment fund. The misrouted money went to lavish parties with celebrity guests like Alicia Keys, a $35 million jet, works by Monet and Van Gogh, property in New York, Los Angeles and London, and (ironically) the funding of the movie The Wolf of Wall Street.

The cash for this mother of all bacchanals originally came from bonds issued by Goldman, which earned a whopping $600 million from the Malaysians. The bank charged prices for its bond issuance that analysts believe were suspiciously high – like a massage price that suggests you’re probably getting more than a massage.

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Not crazy, but the new normal. Because no market.

How Crazy This Week Was For The Stock Market, In One Big Chart (MW)

This Christmas week really was one for the history books. Whiplash, anyone? On Monday, the Dow Jones Industrial, the S&P 500 and the Nasdaq all booked their ugliest-ever plunges in the shortened Christmas Eve trading session. All three indexes rebounded Wednesday, only to sink early Thursday and then turn around in dramatic fashion to finish the session higher. The week finished Friday with an indecisive whimper, as stocks flipped back and forth between gains and losses all day long. The week’s sharp moves were attributed mostly to light holiday trading volume and computer-driven trading. But the ups and downs during a usually calm period are no doubt stoking investor anxiety about what’s to come.

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“..loan funds [must] hold considerable amounts of cash so that they can meet redemptions.”

Leveraged loans and considerable amounts of cash. That don’t rhyme.

Record-Bad Year-End For $1.3-Trillion “Leveraged Loan” Market (WS)

Part of the $1.3 trillion in “leveraged loans” — loans issued by junk-rated overleveraged companies — end up in loan mutual funds and loan ETFs. These funds saw another record outflow in the week ended December 26: $3.53 billion, according to Lipper. It was the sixth outflow in a row, another record. Over the past nine weeks, $14.8 billion had been yanked out, another record. These outflows are, as LCD, a unit of S&P Global Market Intelligence, put it, “punctuating a staggering turnaround for the asset class” that until October was red-hot. Despite $10 billion of net inflows during 2018 through early October, the record outflows at the end of the year caused a net outflow for the entire year of $3.1 billion. What a sudden turnaround!

It can take a long time to sell a leveraged loan. Each is a unique contract, and finding a buyer and agreeing on a price and completing the sale takes time. So loan funds hold considerable amounts of cash so that they can meet redemptions. But now, loan funds faced with this onslaught of redemptions have to dump loans in order to stay ahead of the redemptions and maintain a cash cushion. This forced selling by loan funds has caused prices to drop – which is further motivating investors to yank even more out of those loan funds. Since October 22, the S&P/LSTA US Leveraged Loan 100 Index, which tracks the prices of the largest leveraged loans, has dropped 4.8%. This price decline put the index back where it had been on October 5, 2017. But note, while there have been some defaults recently, the big wave of defaults that many expect in an environment where credit is tightening for risky corporate borrowers, hasn’t even started yet. These are still the good times:

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“..Christmas-to-Christmas growth in the federal debt equals approximately $4,178.10 per average US citizen..”

US Debt Soars $1.4 Trillion From Last Christmas, $44,000 Per Second (RT)

The year-on-year surge in US sovereign debt has totaled $1.37 trillion, the latest data released by the US Treasury Department shows. The national debt reportedly rose to $21,863,635,176,724.12 as of December 20 of the current year compared to $20,492,874,492,282.58 on December 25, 2017. The current US population stands at 328,082,386 according to the December statistics produced by the Census Bureau, a unit of the US Department of Commerce. Rough calculations show that Christmas-to-Christmas growth in the federal debt equals approximately $4,178.10 per average US citizen.

According to Census Bureau estimates, there were 127,586,000 households in the country in 2018, which means that an average American family owes some $10,743.82. Moreover, since the end of the last fiscal year through December 20, the federal government added some $340 billion to the country’s sovereign debt. That means the debt had been skyrocketing at around $3.8 billion per day, or nearly $44,000 per second. US debt is expected to hit $22 trillion in the near future and the ongoing government spending will drive the debt to $33 trillion within a decade.

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Remeber: this is what the economy runs on. This is how money enters that economy.

US Home Sales Decline To Steepen, No Respite In Sight. (WS)

Pending home sales is a forward-looking measure. It counts how many contracts were signed, rather than how many sales actually closed that month. There can be a lag of about a month or two between signing the contract and closing the sale. This morning, the National Association of Realtors (NAR) released its Pending Home Sales Index for November, an indication of the direction of actual sales to be reported for December and January. This index for November fell to the lowest level since May 2014:

“There is no reason to be concerned,” the report said, reassuringly. And it predicted “solid growth potential for the long-term.” And the index plunged 7.7% compared to November last year, the biggest year-over-year percentage drop since June 2014. The drops in October and November are indicated in red:

All four regions got whacked by year-over-year declines: • Northeast : -3.5% • Midwest: -7.0% • South: -7.4% • West: -12.2%. The plunge in pending home sales in the West, a vast and diverse region, will prolong the plunge in closed sales for the region. Particularly on the West Coast, the largest and very expensive markets — Seattle metro, Portland metro, Bay Area, and Los Angeles area — have been experiencing sharp sales declines, a surge in inventory for sale, and starting this summer, declining prices. Today’s pending home sales data confirms that these trends are intact and will likely continue.

The NAR report blames the sales decline in the expensive markets in the West on “affordability challenges” – because prices “have risen too much, too fast,” it said. And this is a true and huge problem: Home prices have shot up for years, even while wages ticked up at much slower rates. At some point, the market is going to run out of people with median incomes who are willing to stretch to the limit to buy a starter shack; and the market is going to run out of people with high incomes who are willing to stretch to the limit to buy a median house.

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“..economies don’t de-grow, at least not in an orderly way.”

Which Side Are You On? (Jim Kunstler)

The true rebalancing of pension funds, and everything else in American life, will come with the recognition that we are tapped out and bumping up against actual limits. Alas, economies don’t de-grow, at least not in an orderly way. They reach a certain complete efflorescence and then they wilt, or collapse. Survival becomes a matter of how human beings adapt to new conditions. Attempts at mitigation — propping up the status quo — add up to a mug’s game, whether it’s stock markets, agri-biz, political parties, weather systems, or influence over people in distant lands.

The argument will come down to the Mitigationists versus the Adapters. The problem for the Mitigators is that most of what they can do is based on pretending: e.g. that some energy miracle is at hand… that we’ll soon be mining asteroids… that we’ll build dikes around Miami Beach… that Modern Monetary Theory (the “science” of getting something for nothing) can negate the physical laws of the universe. The Mitigationists will be disappointed as they “consume” their last images of iPhone porn, waiting for Elon Musk to save the world.

The Adapters will be out there working with the changes that reality serves up, probably with hand tools. There may be a lot fewer of them, living in a more austere everyday economy, but they will remain onstage when the Mitigationists depart this earth in tears for a mysterious realm that turns out not to be a golf course subdivision on Mars with a Tesla in every driveway. Something’s coming and the wild algo instability in the markets is yet another sign that anybody can read. Even if it quiets down for a few weeks in early 2019, as I think it may, the fireworks are only beginning. Which side are you on?

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Maybe not in practice, though.

Universal Basic Income Is Easier Than It Looks (Ellen Brown)

Calls for a Universal Basic Income have been increasing, most recently as part of the Green New Deal introduced by Rep. Alexandria Ocasio-Cortez (D-NY) and supported in the last month by at least 40 members of Congress. A Universal Basic Income (UBI) is a monthly payment to all adults with no strings attached, similar to Social Security. Critics say the Green New Deal asks too much of the rich and upper-middle-class taxpayers who will have to pay for it, but taxing the rich is not what the resolution proposes. It says funding would primarily come from the federal government, “using a combination of the Federal Reserve, a new public bank or system of regional and specialized public banks,” and other vehicles.

The Federal Reserve alone could do the job. It could buy “Green” federal bonds with money created on its balance sheet, just as the Fed funded the purchase of $3.7 trillion in bonds in its “quantitative easing” program to save the banks. The Treasury could also do it. The Treasury has the constitutional power to issue coins in any denomination, even trillion dollar coins. What prevents legislators from pursuing those options is the fear of hyperinflation from excess “demand” (spendable income) driving prices up. But in fact the consumer economy is chronically short of spendable income, due to the way money enters the consumer economy. We actually need regular injections of money to avoid a “balance sheet recession” and allow for growth, and a UBI is one way to do it.

The pros and cons of a UBI are hotly debated and have been discussed elsewhere. The point here is to show that it could actually be funded year after year without driving up taxes or prices. New money is continually being added to the money supply, but it is added as debt created privately by banks. (How banks rather than the government create most of the money supply today is explained on the Bank of England website) A UBI would replace money-created-as-debt with debt-free money – a “debt jubilee” for consumers – while leaving the money supply for the most part unchanged; and to the extent that new money was added, it could help create the demand needed to fill the gap between actual and potential productivity.

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This is a nice effort from Tom Coburg for the Canary, and very much in line with some of the things I’ve said. But he misses an enormous elephant, and it’s hard to see how. See, he cites a May 18 2018 article by Luke Harding, Dan Collyns and Stephanie Kirchgaessner as the instant when the Guardian campaign against Assange started. But just three days prior to that, on May 15, the same authors posted 3 articles about Assange and his relations with Ecuador that are pure smear and very much part of the campaign against Assange. I linked to these things in my May 16 article, “I Am Julian Assange”

Guilty By Innuendo: The Guardian Campaign Against Julian Assange (Canary)

An analysis of articles published by the Guardian over several months reveals what appears to be a campaign to link WikiLeaks founder Julian Assange with Russia and the Kremlin. But the paper has provided little or no evidence to back up the assertions. And amid recent revelations that Guardian journalists have associated with the psychological operations experts at the Integrity Initiative, we should perhaps be more sceptical than ever before. This particular campaign by the Guardian appears to have begun with an article on 18 May 2018 from Luke Harding, Dan Collyns and Stephanie Kirchgaessner.

It stated that “Assange has a longstanding relationship with RT”, the Russian TV broadcaster; and the headline was Assange’s guest list: the RT reporters, hackers and film-makers who visited embassy. Assange has had hundreds of people visit him at the embassy, but the article was keen to focus on the “senior staff members from RT, the Moscow TV network described by US intelligence agencies as the Kremlin’s ‘principal international propaganda outlet’”. On the same day, the Guardian published another article, claiming that Assange had visits from “individuals linked to the Kremlin”, but which offered no evidence for this.

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Nov 162018
 
 November 16, 2018  Posted by at 10:32 am Finance Tagged with: , , , , , , , , , , , ,  


David Hockney Portrait of an Artist (Pool with Two Figures) 1972

 

Julian Assange Has Been Charged, Prosecutors Reveal Inadvertently (WaPo)
IMF Issues Stark Warning On Leveraged Loans (F.)
Elizabeth Warren Says Fed Makes Same Mistakes As Before The Crisis (CNBC)
Global Auto Industry Collapse Continues (ZH)
Brexit Poll: Remain Takes Big Lead Over Leave, 60% Back 2nd Referendum (Ind.)
Theresa May Braced For More Cabinet Resignations After Day Of Chaos (Ind.)
Pound Tumbles As UK Markets Suffer Brexit Deal Volatility (G.)
The Paranoid Fantasy Behind Brexit (Fintan O’Toole)
Easter Island People To Head To London To Request Statue Back (G.)
It Took A UN Envoy To Hear How Austerity Is Destroying Lives (G.)
Rage Against The Cruelty Of So-Called Austerity (G.)
US Studying Turkey’s Demands To Extradite Preacher Gülen (AFP)
California Judge Orders Next Monsanto Weed-Killer Cancer Trial For March (R.)
John Kerry: Europe Must Tackle Climate Change Or Face Migration Chaos (G.)

 

 

Every single news outlet seems to carry a piece on this, and not a single one of them has bothered to do due diligence. They all just stick to the narrative, even if it’s been exposed as false. Every story mentions Mueller and Russia (some even mention terrorism), though it’s crystal clear that Mueller has nothing that links Assange to Russia, least of all that he got files from Russians. Fabricating an Assange-Russia link is needed for US intelligence and media lest the entire collusion story falls to bits. Mueller issued indictments against Russians he knew would never show up to deny or confirm, and he didn’t even have the guts to mention WikiLeaks, but labeled them Company 1. As Mueller knew Assange was safely incommunicado, and wouldn’t be able to deny or confirm. Mueller’s a liar and a coward. A common profile at the FBI, it seems. And the media; they stand up for Khashoggi and let Assange rot.

Julian Assange Has Been Charged, Prosecutors Reveal Inadvertently (WaPo)

WikiLeaks founder Julian Assange has been charged under seal, prosecutors inadvertently revealed in a recently unsealed court filing — a development that could significantly advance the probe into Russian interference in the 2016 election and have major implications for those who publish government secrets. The disclosure came in a filing in a case unrelated to Assange. Assistant U.S. Attorney Kellen S. Dwyer, urging a judge to keep the matter sealed, wrote that “due to the sophistication of the defendant and the publicity surrounding the case, no other procedure is likely to keep confidential the fact that Assange has been charged.” Later, Dwyer wrote the charges would “need to remain sealed until Assange is arrested.”

Dwyer is also assigned to the WikiLeaks case. People familiar with the matter said what Dwyer was disclosing was true, but unintentional. Joshua Stueve, a spokesman for the U.S. attorney’s office in the Eastern District of Virginia, said, “The court filing was made in error. That was not the intended name for this filing.” Federal prosecutors in the Eastern District of Virginia have long been investigating Assange and, in the Trump administration, had begun taking a second look at whether to charge members of the WikiLeaks organization for the 2010 leak of diplomatic cables and military documents that the anti-secrecy group published. Investigators also had explored whether WikiLeaks could face criminal liability for the more recent revelation of sensitive CIA cybertools.

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Horse, barn.

IMF Issues Stark Warning On Leveraged Loans (F.)

An unusually blunt warning about the massive market in leveraged loans from a normally-circumspect IMF should give investors pause at a time of rising concern about global financial stability. Fund economists Tobias Adrian, Fabio Natalucci and Thomas Piontek have published a new blogpost highlighting some fairly alarming trends. “We warned in the most recent Global Financial Stability Report that speculative excesses in some financial markets may be approaching a threatening level. For evidence, look no further than the $1.3 trillion global market for so-called leverage loans, which has some analysts and academics sounding the alarm on a dangerous deterioration in lending standards. They have a point.

“This growing segment of the financial world involves loans, usually arranged by a syndicate of banks, to companies that are heavily indebted or have weak credit ratings. These loans are called ‘leveraged’ because the ratio of the borrower’s debt to assets or earnings significantly exceeds industry norms.” Adrian, a former New York Fed economist and now Director of the Monetary and Capital Markets Department, alluded to some of these risks during a presentation at the CATO Institute’s 36th Annual Monetary Conference held on Thursday in Washington.

“With interest rates extremely low for years and with ample money flowing though the financial system, yield-hungry investors are tolerating ever-higher levels of risk and betting on financial instruments that, in less speculative times, they might sensibly shun,” Adrian and his colleagues write. “Speculative-grade companies have been eager to load up on cheap debt. Globally, new issuance of leveraged loans hit a record $788 billion in 2017, surpassing the pre-crisis high of $762 billion in 2007. The United States was by far the largest market last year, accounting for $564 billion of new loans.”

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Why speak out now? She’s had 10 years to do it.

Elizabeth Warren Says Fed Makes Same Mistakes As Before The Crisis (CNBC)

Ahead of the financial crisis, a buildup of leverage on bank balance sheets that went largely undetected by regulators helped cause the worst downturn since the Great Depression. Sen. Elizabeth Warren is afraid the same thing is happening again a decade later. The Massachusetts Democrat said Thursday that she thinks the Federal Reserve and its fellow watchdogs of the financial system are overlooking a dangerous buildup of loans going to companies that are already deeply in debt. The so-called leveraged loans helped undermine the financial system before and are building up again, now totaling $1.1 trillion. In a face-to-face hearing with Fed Governor Randal Quarles, vice chairman of supervision and thus the central bank’s leading bank regulator, Warren said she is worried about a lack of oversight.

“I’m not sure that I see much distinction between what you’re doing now and what the Fed was doing in pre-2008, and I think that’s deeply worrisome,” she said. “I’m very concerned that the Fed dropped the ball before and they may be dropping it one more time.” Leveraged lending actually has declined in 2018 from its blistering pace the year before. Total volume in the third quarter hit $177 billion, a 40 percent slide compared with the record pace of the same period in 2017, according to Thomson Reuters. Issuance so far this year is tracking at $930 billion, which is a 12 percent decline from a year ago. Institutional share of leveraged loans edged lower to 58 percent in the third quarter, against 60 percent from 2017.

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Yeah, we can never have enough cars.

Global Auto Industry Collapse Continues (ZH)

The outlook for the global automobile market has been increasingly dire lately, especially after a third quarter that saw sales drop in many major markets across the globe, including China. Now, the latest data from Europe suggests that the difficulties may be nowhere close to over despite optimistic fourth quarter guidance by companies like Volkswagen and Daimler AG. Deliveries of new passenger cars were down 7.4% in the EU and the European Free Trade Association in October from the year prior. This adds to a 23% drop that occurred during September according to data from the European Automobile Manufacturers Association, and which was so acute it led to the first negative GDP print for Germany since 2015.

Despite the ongoing sales weakness, which many attribute to one-time events, some analysts – like those at EY Consultancy – still expect the market to turn around in the fourth quarter. They argue that new emissions testing cited by many companies as the reason for disappointing sales, will only have a temporary effect. At the same time, Citigroup analyst Angus Tweedie thinks the downside is not over for companies like BMW and Daimler AG, according to Bloomberg. In a note titled “The Golden Age Ends With a Crash”, Tweedie wrote that “Heading into 2019 we see few remaining avenues of maneuver, and with volume growth slowing in most markets believe the scale of pressures will become obvious.”

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Lots of Brexit stories again today. May has left open an open vote for her allies.

Brexit Poll: Remain Takes Big Lead Over Leave, 60% Back 2nd Referendum (Ind.)

A growing majority of voters would back the UK remaining in the European Union if a fresh referendum was held, a poll suggests. Support for the UK staying in the bloc was at 54 per cent, according to a YouGov survey carried out after Theresa May’s withdrawal agreement text was published on Wednesday night. The poll found 46 per cent would back the Leave side – down two percentage points compared with a survey conducted in August. Almost six in ten (59 per cent) also backed holding a fresh referendum – once “don’t knows” were discounted – the poll, commissioned by the People’s Vote and published in the Evening Standard, found. If Ms May’s deal is voted down by MPs, that gap widened to 64 per cent to 36 per cent, excluding don’t knows.

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She’s going to face a confidence vote. And then another.

Theresa May Braced For More Cabinet Resignations After Day Of Chaos (Ind.)

Theresa May is braced for further cabinet resignations that would spark a challenge to her premiership, after a day of drama that left her Brexit strategy on the verge of collapse. Michael Gove was considering whether to quit, after apparently refusing to take the job of Brexit secretary – dramatically vacated by Dominic Raab – when the prime minister rejected his demands. The environment secretary is believed to have called for Ms May’s draft agreement to be ripped up and renegotiated, and for the cancellation of the 25 November summit with the EU which is intended to seal the deal. Mr Gove left a meeting with the prime minister without an appointment being made – with Penny Mordaunt, the international development secretary, also thought to be still considering quitting.

A defiant Ms May staged a press conference at which she vowed to fight any vote of no confidence in her, saying: “Am I going to see this through? Yes.” Likening herself to the famously stubborn England batsman Geoffrey Boycott, her cricketing hero, she told reporters: “What do you know about Geoffrey Boycott? Geoffrey Boycott stuck to it and he got the runs in the end.”Earlier, Jacob Rees-Mogg, the leading Tory Brexiteer, announced he had submitted a letter of no confidence in the prime minister – creating an expectation that the trigger point of 48 letters would be reached.

However, the threshold was not breached, putting off a vote of no confidence by all 314 other Conservative MPs until Monday at the earliest. Although Ms May is still expected to win such a contest, a large number of Tories rejecting her leadership – perhaps 100 – might still damage her fatally. His position was rocked by seven resignations, with Esther McVey, the work and pensions secretary, quickly following Mr Raab out of the cabinet. Two junior ministers, two unpaid aides and a trade envoy also quit.

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Once people begin to understand how deep the hole is that the UK is in, the pound will really be pounded.

Pound Tumbles As UK Markets Suffer Brexit Deal Volatility (G.)

Britain’s financial regulator has been in contact with City firms as a raft of resignations over Theresa May’s Brexit deal hit markets, sending the pound lower and putting UK housebuilders on track for their worst one-day drop since 2016. The Financial Conduct Authority (FCA) is understood to have been in touch with stock exchanges, bigger banks, and asset management companies regarding market volatility. An FCA spokesman said: “As you would expect in this type of situation we have regular contact with firms and will continue to engage with them.” Investors were offloading shares in FTSE-quoted companies with large domestic businesses and UK currency holdings in an effort to reduce their exposure to the British economy.

Royal Bank of Scotland was the biggest faller on the FTSE 100, with shares closing down 9.6% at 224p. The market value of the bank, still 62% owned by the government, fell by £2.8bn in Thursday’s sell-off. Housebuilders Persimmon, Taylor Wimpey and Barratt Developments all closed down more than 7%, with Berkeley Group falling more than 6%. The four FTSE 100 housebuilders lost £1.6bn collectively from their market capitalisations. The pound also took a tumble against major international currencies, dropping from above $1.30 to less than $1.28 against the US dollar by Thursday afternoon, a drop of 1.9%. Against the euro, sterling fell by 2% to just under €1.13.

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Excellent and scary Brexit background. The stupid idea of empire just won’t die. Britain is either an empire or a colony. There’s nothing in between.

The Paranoid Fantasy Behind Brexit (Fintan O’Toole)

Before the narrative of Len Deighton’s bestselling thriller SS-GB begins, there is a “reproduction” of an authentic-looking rubber-stamped document: “Instrument of Surrender – English Text. Of all British armed forces in United Kingdom of Great Britain and Northern Ireland including all islands.” It is dated 18 February 1941. After ordering the cessation of all hostilities by British forces, it sets down further conditions, including “the British Command to carry out at once, without argument or comment, all further orders that will be issued by the German Command on any subject. Disobedience of orders, or failure to comply with them, will be regarded as a breach of these surrender terms and will be dealt with by the German Command in accordance with the laws and usages of war.”

Written amid the anxieties of Britain’s early membership of the European Communities and published in 1978, Deighton’s thriller sets up two ideas that will become important in the rhetoric of Brexit. Since there is no sense that Deighton has a conscious anti-EU agenda, the idea seems to arise from a deeper structure of feeling in England. One is the fear of the Englishman turning into the “new European”, fitting himself into the structures of German domination. His central character is a harbinger of the “rootless cosmopolitan” who cannot be trusted to uphold English independence and English values, and who therefore functions as the enemy within, the quisling class of pro-Europeans. This is the treason of the elite, the puppet politicians and sleek mandarins who quickly accommodate themselves to the new regime.

Deighton was building on real historical memories of the appeasers whose prewar conduct makes the notion that they would have quickly become collaborators in the event of a defeat to the Nazis highly credible. This idea of a treacherous elite would later ferment into a heady and intoxicating brew of suspicion that the Brexiteers would both dispense to the masses and consume themselves. The other crucial idea here is the vertiginous fall from “heart of Empire” to “occupied colony”. In the imperial imagination, there are only two states: dominant and submissive, coloniser and colonised. This dualism lingers. If England is not an imperial power, it must be the only other thing it can be: a colony.

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More of the idiotic empire stuff. Just give back what you’ve stolen, you morons. Yeah, the Parthenon marbles too. You stole them from a European Union member. Put your Stonehenge thingy in the British Museum, not other people’s rightful possessions. Bunch of ordinary thieves.

Easter Island People To Head To London To Request Statue Back (G.)

Towering at the entrance of the British Museum’s Wellcome gallery is a 2.5-metre basalt statue from Easter Island. For indigenous Rapa Nui islanders, such statues – known as moai – carry the spirit of prominent ancestors and are considered the living incarnation of their relatives. Next week, a delegation from the island – which has been part of Chile since 1888 and is officially known as Rapa Nui – will travel to London to request the moai’s return, emboldened by the backing of the Chilean government and the museum’s willingness to engage in talks for the first time since it acquired the statue in 1869.

“We want the museum to understand that the moai are our family, not just rocks. For us [the statue] is a brother; but for them it is a souvenir or an attraction,” says Manutomatoma, who serves on the island’s development commission. “Once eyes are added to the statues, an energy is breathed into the moai and they become the living embodiment of ancestors whose role is to protect us.” Having spent 150 years away from its home, the statue – known as Hoa Hakananai’a –has become the focal point of a movement to return the moai which has steadily gathered momentum since August, when the island’s mayor, Pedro Edmunds, wrote to the museum requesting the statue’s return. Among the proposals the delegation will bring to the table is the idea of a replica statue being carved by artisans on the island to take the place of Hoa Hakananai’a.


Hoa Hakananai’a (‘lost or stolen friend’) c. 1000-1200 AD

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Brexit is playing out in a 3rd world nation. That explains a lot. But it doesn’t explain why Jeremy Corbyn doesn’t lead in the polls.

It Took A UN Envoy To Hear How Austerity Is Destroying Lives (G.)

Over the weekend, I asked Alston whether he heard any echoes between British experiences and the testimonies he heard last December while investigating Donald Trump’s US. “In many ways, you in the UK are far ahead of the US,” he said. He thinks “the Republicans would be ecstatic” to have pushed through the kind of austerity that the Tories have inflicted on the British. Like others at the Guardian, I have been writing on the debacle of austerity Britain for years now. Rather than the goriest details, what strikes me is how normalised our country’s depravities have become over the course of this decade. Ordinary people speak in ordinary voices about horrors that are now quite ordinary.

They go to food banks, which barely existed before David Cameron took office. Or they go days without food even in London, the city that has more multi-millionaires than any other. They spend their wages to rent houses that have mice or cockroaches or abusive landlords. Any decent society would see these details are shocking; yet they no longer shock anyone in that hall. What will remain with me of that afternoon is the sheer prosaic weight of the abuse being visited on ordinary people who could be my friends or family. Alston has heard so many stories about the toxic failings of universal credit and the malice that is the disability benefits assessment scheme that he is in no doubt about the truth.

The question for McVey, who is due to meet the UN party this week, will be how she responds to the weight of people’s lived experience. None of those giving evidence this afternoon want victim status. They are, as Trinity says, “survivors”. What they want is to be heard – and after that they want remedies. [..] the government, like most of the press, didn’t want the truth to be acknowledged – because then it would be compelled to act. This is what Britain has been reduced to: hoping that a foreigner has the stomach and integrity to hear and record our decade of shame.

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This is the rage that Corbyn should be talking about 24/7. Instead of giving interviews on how Brexit can’t be stopped.

Rage Against The Cruelty Of So-Called Austerity (G.)

Outrage, anger, despair, shame, impotence [..] The truths consequent on the savage, unnecessary, uncaring cuts to public services are not hidden away but confront us daily. Welfare benefits slashed, millions dependent on food banks. Libraries, museums, childcare centres, youth clubs, swimming pools consigned to the scrapheap; road repairs and park budgets cut, bus routes terminated. In Darley Dale a helpful notice tells us that the lavatory is closed and the nearest one is 2.1 miles away. The true story is that of a government that has chosen private profit over civic services, while it wreaks an assault on the services that make towns and communities good places to live.

In a 2015 Guardian article about benefits, sanctions and food banks, Ken Loach called for “public rage” and spoke about “conscious cruelty”. The word “austerity” has allowed the government to disguise both intent and outcome. In its original meaning “austerity” suggests plainness and simplicity, a cosy view of cutting back, perhaps a mythical wartime pulling together. “Austerity” is now a weasel word used to promote the Tory rhetoric that there is no alternative, that anaesthetises public anger as we are led to believe that there is no choice. There must be a new script. We should ban the word.

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Want to lose credibility? This is an excellent way. Assange and Gülen turned into trade objects.

US Studying Turkey’s Demands To Extradite Preacher Gülen (AFP)

The United States is studying Turkey’s demands for the extradition of preacher Fethullah Gulen, who is accused by Ankara of orchestrating a failed 2016 coup attempt, the State Department said Thursday. But spokeswoman Heather Nauert rejected the allegation in an NBC report that the White House is seeking a way to extradite Gulen — who reportedly has a US Green Card — in a bid to reduce Turkish pressure on Saudi Arabia over the murder of a dissident journalist. “We have received multiple requests from the Turkish government… related to Mr Gulen,” Nauert said.

“We continue to evaluate the material that the Turkish government presents requesting his extradition,” she said. But Nauert insisted that “there is no relation” between the Gulen extradition issue and Turkish pressure on Saudi Arabia over the murder of journalist Jamal Khashoggi at the kingdom’s consulate in Istanbul. The White House “has not been involved in any discussions related to the extradition of Fetullah Gulen,” she said. NBC, citing four anonymous sources, reported that Trump administration officials had asked law enforcement agencies about “legal ways of removing” Gulen, 77, from the US to persuade Turkey’s president “to ease pressure on the Saudi government.”

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9,300 more lawsuits to go. Better combine a few.

California Judge Orders Next Monsanto Weed-Killer Cancer Trial For March (R.)

A California judge on Thursday granted an expedited trial in the case of a California couple suffering from cancer who sued Bayer AG’s Monsanto unit, alleging the company’s glyphosate-containing weed killer Roundup caused their disease. The order by Superior Court Judge Ioana Petrou in Oakland, California, comes on the heels of a $289 million verdict in the first glyphosate trial in San Francisco, in which a jury found Monsanto liable for causing a school groundskeeper’s cancer. Damages were later reduced to $78 million, and Bayer, which denies the allegations, said it would appeal the decision. Its share price, however, has dropped nearly 30 percent since the Aug. 10 jury verdict and the company faces some 9,300 U.S. glyphosate lawsuits.

Petrou’s ruling clears the way for the second California jury trial over glyphosate, the world’s most widely used weed killer. The trial of California residents Alva and Alberta Pilliod is scheduled to begin on March 18, 2019, according to a court filing. Glyphosate jury trials will ramp up next year. The company is scheduled to face jurors in a Missouri state court in St. Louis, where the first trial was set to begin in early February. That date, however, was vacated by a judge, Bayer said, and the trial is likely to be postponed to later in 2019. A trial in San Francisco federal court, where federal Roundup lawsuits are consolidated, is scheduled to begin at the end of February.

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If it wasn’t clear yet what a worthless piece of dung John Kerry has always been: it’s not the climate that drives African to Europe, it’s US warfare, interventions and arms sales.

John Kerry: Europe Must Tackle Climate Change Or Face Migration Chaos (G.)

Europe faces even deeper political turmoil and the possibility of mass migration from Africa unless the world urgently addresses the threat of climate change, the former US secretary of state John Kerry said on Thursday. Speaking at a Guardian Live event, he said he was deeply disturbed at how issues such as climate change, cyber wars and the future of the oceans were not ballot box issues, admitting it was hard to translate these issues into an acceptable set of choices for voters. Kerry said: “We are heading for catastrophe unless we respond to some life-threatening challenges very rapidly. We have a climate-denying president that pulls us out of the the Paris climate change agreement at a time when literally every day matters.

“Europe is already crushed under this transformation that is taking place due to migration. In Germany Angela Merkel is weakened. Italian politics is significantly impacted. “Well, imagine what happens if water dries up and you cannot produce food in northern Africa. Imagine what happens if Nigeria hits its alleged 500 million people by the middle of the century … you are going to have hordes of people in the northern part of the Mediterranean knocking on the door. I am telling you. If you don’t believe me, just go read the literature.” The former secretary of state for the Obama administration reminded his audience that climate change scientists had just warned that historically unprecedented steps were needed to prevent an extra 0.5C (32.9F) degrees increase.

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Dec 082014
 
 December 8, 2014  Posted by at 11:36 am Finance Tagged with: , , , , , , , , , ,  


Russell Lee Front of livery stable, East Side, New York City Jan 1938

Japan’s Economy Is Worse Than Feared (WSJ)
Japan’s Recession Deepens as Election Looms for Abe (Bloomberg)
China Trade Data Miss Forecasts By A Wide Margin (MarketWatch)
China Trade Data Paints Dreary Picture Of Economy (CNBC)
The Two Main Threats That Are Shaking Global Firms: China And Deflation (CNBC)
Oil, Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next (Wolf)
Canada’s LNG Export Dream Is Dead (Oilprice.com)
Dollar Surge Endangers Global Debt Edifice, Warns BIS (AEP)
Sudden Swings Expose Fragility Of Financial Markets: BIS (Reuters)
International Lending To China Soars In 2014: BIS (Reuters)
Why The Dollar Is Still King: BIS (CNBC)
Why The World Is Like A Real-Life Game Of Global Domination (Guardian)
Citigroup Panicked Over Fraud at Chinese Ports (Bloomberg)
The Long Slow Inexorable Demise Of America’s Working-White-Male (Zero Hedge)
ECB’s Loans Offer Clues In QE Guessing Game (Reuters)
Bank of England: Half A Million Housebuyers Face Mortgage Arrears (Guardian)
Bank of England: UK Banking To Double In Size, Reach 950% of GDP (Guardian)
Keep An Eye On The Fed’s Accelerating Asset Sales (CNBC)
Bill Gross: You Can’t Cure Debt With More Debt (CNBC)
The Most Essential Lesson of History That No One Wants To Admit (Beversdorf)
Uncork the Central Bank Bubbly (StealthFlation)
Taming Corporate Power: The Key Political Issue Of Our Age (Monbiot)

“The key economic figures come just six days before general elections ..”

Japan’s Economy Is Worse Than Feared (WSJ)

Japan’s economy contracted for the second straight quarter in the July-to-September period, revised data released Monday showed, serving as a bitter reminder to Prime Minister Shinzo Abe that the nation’s economy remains in the woods two years after he came into office. Gross domestic product shrank an annualized 1.9% in the third quarter from the previous three-month period. The government last month estimated that the economy shrank 1.6% in the third quarter after a 6.7% plunge in the second quarter, indicating that the economy had entered a recession.

The key economic figures come just six days before general elections, which Mr. Abe is framing as a referendum on his economic policy program known as Abenomics. Recession or not, Japan’s economy is in a funk. Private consumption, the most important pillar of the economy, has shown little sign of life after a one-two punch of a sales tax increase in April and inflation caused by the yen’s 30% fall against the dollar. The consumption slump had led businesses to slash production and capital investment, further undermining economic growth.

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How crazy will he get after being re-elected?

Japan’s Recession Deepens as Election Looms for Abe (Bloomberg)

Japan’s recession was deeper than initially estimated as company investment unexpectedly shrank, a blow to Prime Minister Shinzo Abe as he campaigns for re-election on his economic credentials. The economy contracted an annualized 1.9% in the July to September period from the previous quarter, weaker than the 1.6% drop reported in preliminary data. The result was also below every forecast in a Bloomberg News survey that showed a median 0.5% decrease. The surprise decline in business investment sapped the strength of the world’s third-biggest economy, compounding damage from a slump in consumer spending after a sales-tax rise in April. With the main opposition party caught unprepared, Abe is on-track to win the Dec. 14 election, even as a decline in the yen cuts into people’s spending power. “Today’s report shows a pretty bleak picture of Japan’s economy,” said Taro Saito, director of economic research at NLI Research Institute in Tokyo. “We are going to see a recovery but only a gradual one. The weakening yen should provide a boost to manufacturers and those benefits will penetrate through a wide range of industries.”

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Not much use, these analysts.

China Trade Data Miss Forecasts By A Wide Margin (MarketWatch)

China’s exports rose a disappointing 4.7% in November while imports unexpectedly fell, as the world’s second-largest economy grapples with sluggish global activity and weak demand at home. Analysts said the data the government released on Monday show that the country’s crucial export sector – the one segment of the economy that had been showing signs of strength – was struggling during the month. “This was worse than expected,” said Ma Xiaoping, economist at HSBC. “We can see there is considerable downward pressure on the economy.” China’s economy has been showing slower growth after years of double-digit expansion. Growth slipped to 7.3% year-over-year in the third quarter, its slowest pace in more than five years. Full-year growth could fail to reach the government target of about 7.5% for the year.

November exports were below market expectations of an 8% gain compared with a year earlier and much less robust than the 11.6% increase in October. Meanwhile, imports sank 6.7% against expectations for a 3% rise, after a 4.6% year-over-year rise in October. Analysts said a rebound in the yuan’s value against other currencies could have been a factor. CIMB economist Fan Zhang said the weak export growth also reflects a strong month in the year-earlier period, while the drop in imports includes the impact of a sharp decline in global commodities prices, particularly oil. “In 2015, I still expect exports to improve over 2014 because of U.S. economic growth,” Mr. Zhang said. China’s central bank in late November cut benchmark interest rates for the first time in more than two years in a bid to give the economy a boost and cut borrowing costs for struggling companies. It has also injected liquidity into the banking system and encouraged banks to lend to struggling small businesses and the agricultural sector.

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Time for Xi and Li to set a new, much power, growth target?!

China Trade Data Paints Dreary Picture Of Economy (CNBC)

China’s annual import and export figures slowed sharply in November, data showed on Monday, reinforcing signs of fragility in the world’s second-largest economy. Exports rose 4.7% in November from a year earlier, much slower than an 11.6% rise in October and below expectations for an 8.2% increase in a Reuters poll. Imports fell an annual 6.7% in November, well below October’s 4.6% rise, and below expectations for a 3.9% increase. That left the country with a trade surplus of $54.5 billion for the month, above expectations of $43.5 billion. The Australian dollar weakened against the U.S. dollar after the data was released, recently trading at $0.8297.

“It’s clear domestic demand is pretty weak, most of the decline seems to be commodity related – which partly reflects lower prices, but is also because of the slowdown in the housing sector and overcapacity in industrial sectors,” Alaistair Chan, economist at Moody’s Analytics told CNBC. The slowdown in exports, meanwhile, was likely driven by a clamp down on over-invoicing seen earlier in the year and could suggest a cooling in global demand, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole.

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“The Asian powerhouse, which has been the world’s biggest consumer of raw materials, is now on course to post its slowest growth in nearly a quarter of a century.”

The Two Main Threats That Are Shaking Global Firms: China And Deflation (CNBC)

With an uneasiness looming over the global economy as the year draws to a close, chief financial officers (CFOs) have told CNBC that softer growth in China and the threat of deflation in the euro zone are the two biggest issues their firms are facing. Fifty-one CFOs from Europe and Asia – who make up the CNBC CFO Global Council – were asked what the major risks that their firms are currently up against. Coming ahead of the pack by a clear margin was the threat of falling growth in China. It came top of the list for Asian CFOs and was the third biggest risk for their European counterparts. When asked which of the year’s geopolitical or economic risks had the greatest impact on their businesses, 57% pointed at the warning signs coming from the world’s second largest economy.

The results underline how important China is for global confidence as the country shifts from its traditional role as the world’s factory floor to becoming a consumer-led economy. The Asian powerhouse, which has been the world’s biggest consumer of raw materials, is now on course to post its slowest growth in nearly a quarter of a century. It grew 7.3% year-on-year during the July-September period, its slowest pace in more than five years, jeopardizing Beijing’s 7.5% target for 2014. The slowdown comes after years of double-digit growth and at a time when the country’s new leadership is stepping up regulation and trying to curb an overheated credit market. As well as the tougher stance by Beijing, there has been a more gentle touch from the People’s Bank of China.

The central bank looks increasingly ready to backstop the economy and manage the fall in growth after announcing a surprise rate cut last month. Diana Choyleva, the head of macroeconomic research at Lombard Street Research, believes that growth and monetary conditions in China are actually much weaker than the official numbers suggest. She regularly concentrates her research on the country and said in a note last week that Beijing is battling an ongoing correction in investment and capital flight from its shores. “China’s banks are one of the victims of Beijing’s past excesses and will have to pay the price as the needed cleanup and financial market reforms unfold,” she said.

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“.. what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.”

Oil, Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next (Wolf)

The price of oil has plunged nearly 40% since June to $65.63, and junk bonds in the US energy sector are getting hammered, after a phenomenal boom that peaked this year. Energy companies sold $50 billion in junk bonds through October, 14% of all junk bonds issued! But junk-rated energy companies trying to raise new money to service old debt or to fund costly fracking or off-shore drilling operations are suddenly hitting resistance.

And the erstwhile booming leveraged loans, the ugly sisters of junk bonds, are causing the Fed to have conniptions. Even Fed Chair Yellen singled them out because they involve banks and represent risks to the financial system. Regulators are investigating them and are trying to curtail them through “macroprudential” means, such as cracking down on banks, rather than through monetary means, such as raising rates. And what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.

This monthly chart by S&P Capital IQ’s LeveragedLoan.com shows the leveraged loan index for the oil and gas sector. Earlier this year, when optimism about the US shale revolution was still defying gravity, these loans were trading at over 100 cents on the dollar. In July, when oil began to swoon, these loans fell below 100 cents on the dollar. The trend accelerated during the fall. And in November, these loans dropped to around 92 cents on the dollar.

How bad is it? The number of leveraged loans in the oil and gas sector trading between 80 and 90 cents on the dollar (blue line in the chart below) has soared parabolically from 0% in September to 40% now. These loans are now between 10% and 20% in the hole! And some leveraged loans are now trading below 80 cents on the dollar:

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And so is Australia’s.

Canada’s LNG Export Dream Is Dead (Oilprice.com)

Lower oil prices have killed off major plans for liquefied natural gas exports from Canada’s west coast. On December 2 the state-owned oil company of Malaysia, Petronas, decided to shelve plans to build an enormous LNG export terminal in British Columbia, citing the falling price of oil. It is common for LNG contracts to be priced using a formula linked to the price of crude oil, so declining oil prices pushes down prices for LNG. Petronas’ Pacific NorthWest LNG, as it was known, was a proposed $32 billion export terminal that would send LNG to Asia. The decision highlights how competitive global LNG trade has become, despite growing demand. Greenfield projects, such as Pacific Northwest LNG, face steep startup costs that become prohibitive when oil prices fall. Although low oil prices may have been the icing on the cake, Canadian LNG projects were facing serious obstacles before oil prices plummeted.

There is stiff competition from a slew of LNG projects already under construction in the U.S. and Australia, which will come online much earlier than anything from British Columbia. Several LNG export facilities in the U.S. are not starting from scratch, for example. The Sabine Pass terminal on the Gulf Coast and the Cove Point facility on the Chesapeake Bay were both originally constructed to import LNG rather than export. The original facilities were put on ice when the U.S. no longer needed LNG imports. Now, companies are retrofitting them to handle exports – a much cheaper process than building a new facility. The indefinite cancellation of Pacific NorthWest LNG is a major setback for Canada’s plans to export natural gas. The move comes after BG Group abandoned plans to build a separate LNG export terminal on Canada’s west coast. Chevron is also in limbo with its Kitimat LNG project after its partner Apache pulled out.

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“BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar.”

Dollar Surge Endangers Global Debt Edifice, Warns BIS (AEP)

Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world’s financial stability, the Bank for International Settlements has warned. The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47%. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars. A chunk of China’s borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. “To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns,” said the BIS in its quarterly report. “More than a quantum of fragility underlies the current elevated mood in financial markets,” it warned.

Officials are disturbed by the “risk-on, risk-off, flip-flopping” by investors. Some of the violent moves lately go beyond stress seen in earlier crises, a sign that markets may be dangerously stretched and that many fund managers do not really believe their own Goldilocks narrative. “Mid-October’s extreme intraday price movements underscore how sensitive markets have become to even small surprises. On 15 October, the yield on 10-year US Treasury bonds fell almost 37 basis points, more than the drop on 15 September 2008 when Lehman Brothers filed for bankruptcy.” “These fluctuations were large relative to actual economic and policy surprises, as the only notable negative piece of news that day was the release of somewhat weaker than expected retail sales data for the US one hour before the event,” it said.

The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said. BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar. “The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions,” it said.

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They do know.

Sudden Swings Expose Fragility Of Financial Markets: BIS (Reuters)

Sudden swings in financial markets recently suggest they are becoming increasingly sensitive to unexpected events, the global organization of central banks said on Sunday, warning “more than a quantum of fragility” underlies the current bullish mood. MSCI’s all-country world stock index is hovering around multi-year highs after rebounding from sell-offs in August and October. The downturns were triggered by uncertainty over the global economic outlook and monetary policy, as well as geopolitical tensions, and the Bank for International Settlements (BIS) said the sharp and sudden dips pointed to frailty in the markets. “These abrupt market movements (in October) were even more pronounced than similar developments in August, when a sudden correction in global financial markets was quickly succeeded by renewed buoyant market conditions,” the BIS said in its quarterly review.

“This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets,” it said, adding that recent developments suggest markets are becoming “increasingly fragile” “Global equity markets plummeted in early August and mid-October. Mid-October’s extreme intra-day price movements underscore how sensitive markets have become to even small surprises,” it said in the report. The comments followed the organization’s warning in September that financial asset prices were at “elevated” levels and market volatility remained “exceptionally subdued” thanks to ultra-loose monetary policies being implemented by central banks around the world.

Since then, the U.S. Federal Reserve has brought its monthly bond-purchase program to an expected end. However, Japan’s central bank has spurred global markets by expanding its massive stimulus spending while China unexpectedly cut interest rates, adding to stimulus measures from the European Central Bank. The BIS said these divergent monetary policies, coupled with the recent appreciation of the dollar, could have a “profound impact” on the global economy, particularly in emerging markets where many companies have large dollar-denominated liabilities. Separately, the BIS report said that international banking activity expanded for the second quarter running between end-March and end-June. Cross-border claims of BIS reporting banks rose by $401 billion. The annual growth rate of cross-border claims rose to 1.2% in the year to end-June, the first move into positive territory since late 2011.

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“China’s share of BIS reporting banks’ foreign claims on all emerging markets stood at 28% in mid-2014, up from just 6% at the end of 2008.”

International Lending To China Soars In 2014: BIS (Reuters)

China has become the largest emerging market destination for international bank lending, accounting for more than a quarter of cross-border claims on all emerging market economies, a central banking report shows. Cross-border claims on China increased by $65 billion in the second quarter of 2014 to $1.1 trillion, and were up nearly 50% in the year to the end of June, according to a quarterly report from the Bank for International Settlements on Sunday. “China has become by far the largest (emerging market) borrower for BIS reporting banks. Outstanding cross-border claims on residents of China totaled $1.1 trillion at end-June 2014, compared with $311 billion on Brazil and slightly more than $200 billion each on India and Korea,” the report says.

It said China’s share of BIS reporting banks’ foreign claims on all emerging markets stood at 28% in mid-2014, up from just 6% at the end of 2008. The BIS, often referred to as the central bankers’ central bank, says China’s status as the principal emerging market destination for international bank lending reflects a “remarkable evolution” since the financial crisis of 2008-9. However, concerns are mounting among international investors of a credit bubble developing in China, with the country’s property market seen as the biggest risk to the economy.

In late November, after saying for months that China did not need any big economic stimulus, the People’s Bank of China surprised financial markets with its first interest rate cut in more than two years to shore up growth and help firms pay off mountains of debt. Outside China, cross-border claims on emerging market economies rose 2.7%, or $33 billion, in the three months to the end of June, the BIS said, with the increase coming mainly from Asia. However, cross-border lending to Russia declined 10%. Russia has seen its finances come under strain from western sanctions over Moscow’s role in the Ukraine crisis and the falling price of oil, its main export.

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“We argue that the dollar’s role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates – the ‘dollar zone’ ..”

Why The Dollar Is Still King: BIS (CNBC)

A question that has frustrated even the most experienced economists in the last few decades is how the dollar has remained the most prominent reserve currency in the world despite the global share of U.S. output eroding away. The Bank for International Settlements (BIS), a Basel-based institution that is known as the central bank of central banks, thinks it has found the answer. “We argue that the dollar’s role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates – the ‘dollar zone’,” it said in its new quarterly report released on Sunday. In 1978, economists Robert Heller and Malcolm Knight were credited as first to draw attention to the fact that countries held an average of 66% of their foreign-exchange reserves in dollars. Even today that number hasn’t budged much with the latest statistics from the International Monetary Fund showing that just over 60% of allocated funds are held in the greenback.

The higher the correlation in price between a given currency and the dollar, the higher the economy’s dollar share of that country’s official reserves, according to Robert McCauley and Tracy Chan, the two authors of the BIS report. The report adds that the dollar’s robustness comes despite an 18% decline against major currencies since 1978 and the U.S. economy’s share of global GDP (gross domestic product) shrinking 6% in those 36 years. “The ‘dollar zone’ still accounts for more than half of the global economy. In countries whose currencies are more stable against the dollar than against the euro, reserve composition that favors the dollar produces more stable returns in terms of the domestic currency,” they said.

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It’s a shame this guy feels he needs to resort to Putin bashing.

Why The World Is Like A Real-Life Game Of Global Domination (Guardian)

Putin gives a speech and the rouble falls. Europe’s central bank boss gives a speech and the stock markets fall. Opec meets in Vienna and the oil price plummets. Japan’s prime minister calls a snap election and the yen’s slide against the dollar accelerates. All these things in the last six weeks of an already fractious year. There are suddenly multiple conflicts being played out in the global markets, conflicts the global game’s usual rules are not built to handle. The first concerns a clear game of beggar thy neighbour between China and Japan. Since 2012 Japan has printed money hand over fist, with the aim of kickstarting economic growth. With growth stalling for a third time in the final quarter of 2014 its premier Shinzo Abe printed more. China perceives this as unfair competition, and with its own growth slowing, it responded in late November with a surprise interest-rate cut.

Many see this as the outbreak of a classic currency war, along 1930s lines, where rival economic giants engage in a pointless game of devaluing their own currency – boosting exports but hitting the spending power of their people – to their mutual detriment. By hitting each other’s capacity to export, they edge the region towards deglobalisation. The second new dynamic is the game of chicken being played over the oil price between America, Russia and Opec. Oil demand is falling because growth in the emerging markets – China, Brasil and the like – is slowing down. Yet supply has risen – by 11m barrels to 92m barrels per day since the global financial crisis began. America has become the world’s biggest oil producer thanks to the rapid rollout of shale and deep sea oilfields.

Since June 2014 the price of a barrel of Brent crude has fallen from $115 to $68 – and after Opec met in late November and rejected calls to cut production some analysts predicted the price could collapse to $40. Saudi Arabia and the other gulf monarchies were the key players in the decision to keep production high and prices falling – and few doubt there is politics behind the move. It hurts Russia, Venezuela and Iran. For Saudi Arabia there are scores to settle with both Russia and Iran over their role in crushing the Syrian revolution, and with Venezuela for being Russia’s perpetual Bolivarian cheerleader.

As a result, Vladimir Putin has had to admit to his people that a combination of western sanctions and Saudi oil strategy will push Russia into recession next year. At times like this economists resort to game theory, warning sparring countries that, in a game where everybody is trying to shrink something – whether it be prices or currencies – everybody loses out. So let’s game it out – not in the austere language of theory but of the empire-building “god games” popular on games consoles.

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The whole shebang is still under lockdown after all this time.

Citigroup Panicked Over Fraud at Chinese Ports (Bloomberg)

Citigroup was in a “state of panic” when alleged fraud was uncovered in two Chinese ports, Mercuria Energy’s lawyer said as a London trial over disputed metal finance deals got under way. “The discovery of the fraud was a massive problem for Citi as it was their metal and it was at their risk,” Mercuria lawyer Graham Dunning told a London judge. “There was a state of panic.” The disputed copper and aluminum is under lockdown in the ports of Qingdao and Penglai, where Chinese authorities are investigating an alleged fraud. Neither side can get access and they don’t know how much of the metal is there, Dunning said at a pre-trial hearing in August. Citigroup argues that it effectively delivered the metal to Mercuria under the terms of a sale-and-repurchase agreement by handing over warehouse receipts. The bank says it is owed about $270 million. Mercuria, a Cyprus-based firm with major trading operations in Geneva, argues the products were never properly delivered.

“It appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges,” Dunning said today. The probe at Qingdao, China’s third-largest port, is examining companies owned by a Chinese-Singaporean metals trader, Chen Jihong, who is alleged to have pledged the same metal inventories multiple times for collateral on loans. Chinese authorities have uncovered almost $10 billion in fraudulent trade, including irregularities at Qingdao, according to the country’s currency regulator. Standard Chartered, Standard Bank and ABN Amro have also made loans affected by the alleged fraud. “Mercuria’s apparent goal is for it to be Citi, not Mercuria, which is left out of pocket,” Citigroup said in documents from the trial. Mercuria was responsible for safeguarding and insuring the metal, the bank said.

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What do they do all day?

The Long Slow Inexorable Demise Of America’s Working-White-Male (Zero Hedge)

Not “off the lows”…

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Germany holds the levers here.

ECB’s Loans Offer Clues In QE Guessing Game (Reuters)

The guessing game over the timing of euro zone money printing will intensify as the European Central Bank unveils a closely watched gauge of policy in the coming week, the highlight of a calendar dominated by Europe’s malaise. On the other side of the Atlantic, investors will continue placing their bets on a different but equally crucial event: when the U.S. Federal Reserve might raise interest rates. U.S. data and several Fed central bankers will give a sense of the speed of the recovery and when a rate rise might be merited, while oil prices and Chinese data will provide plenty more for markets to digest. “The key story is going to be in the euro zone,” said James Knightley, ING’s senior economist, referring to the results of the ECB’s targeted long-term refinancing operations (TLTROs) on Thursday. The cheap loans for banks are one of the ECB’s main ways to flush money into the stagnating euro zone economy. “If the take-up is poor, that could increase market talk that the ECB is going to step in and use other tools,” Knightley said.

That means a sovereign bond-buying program like those used in the United States, Britain and Japan, but which Germany fears would encourage reckless state borrowing and fuel inflation. Such a program may come early next year. “The take-up of TLTROs could swing the ECB’s Governing Council between January and March, depending on how the number looks,” said Citigroup economist Guillaume Menuet. The first TLTRO was taken up only to the tune of €83 billion. Hopes are higher for this time but forecasts hover around the €150 billion mark, leaving the ECB short of the €400 billion it was prepared to offer banks in total. On Monday in Brussels, ECB President Mario Draghi will tell euro zone finance ministers no amount of stimulus can replace reforms to tax, labor and pension systems to bring down near-record unemployment.

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Rate rises will be murder.

Bank of England: Half A Million Housebuyers Face Mortgage Arrears (Guardian)

The Bank of England has warned half a million families would be at risk of falling into mortgage arrears once it started to raise interest rates from their emergency level of 0.5%. Threadneedle Street said the number of households running into difficulties would increase by a third to 480,000 in the event of a two-percentage-point increase in the cost of borrowing. The Bank stressed the proportion of borrowers having trouble paying their home loans should remain well below the levels of the early 1990s – when Britain suffered its worst postwar property crash – provided incomes rose alongside interest rates. “Higher interest rates will increase financial pressure on households with high levels of debt,” the Bank said in its Quarterly Bulletin. “The%age of households with high debt-servicing ratios, who would be most at risk of financial distress, is not expected to exceed previous peaks given the likely paths of interest rates and income.

“But developments in incomes for the households who are potentially most vulnerable will be an important determinant of the extent to which financial distress does increase.” The findings were based on a survey for the Bank conducted by NMG consulting. It found that the average outstanding mortgage debt was £83,000 per household, with average household income of £33,000 a year (£43,000 for those with a mortgage) and unsecured debt £8,000. Interest rates have been pegged at 0.5% – the lowest in the Bank’s 320-year history – since March 2009 and cheap borrowing costs have made it easier for households with large home loans to keep up payments on their mortgages. The Bank has used its forward guidance policy to stress that interest rate rises, when they come, will be gradual and limited in size. Financial markets do not anticipate the first rise to come before the second half of 2015 but the Bank is exploring the impact of tighter policy on households where more than 40% of income is spent on mortgage repayments, since these housebuyers are most likely to fall into arrears.“

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Oh, great! 950% of GDP. What could go wrong?

Bank of England: UK Banking To Double In Size, Reach 950% of GDP (Guardian)

Britain’s exposure to its banks, already the largest in the G20 group of leading nations, is set to double in the next 35 years. “The size of the UK banking system might roughly double from its current size to over 950% of GDP by 2050, far outstripping the projected increase in other G20 banking systems,” the Bank of England said. The UK’s banking system is currently 450% of GDP, Threadneedle Street said. In money terms, it would amount to a rise from over £5tn to £60tn. “Some have suggested that the current size of the UK banking system represents a material risk to economic stability and that action should be taken to reduce its size,” the central bank said in its latest quarterly bulletin. However, in an article asking “Why is the banking system so big and is that a problem?” the Bank of England said it had not found evidence of a link between the size of the economy and the risk of a crisis.

It said more work was needed and that it had not looked at the interconnectedness of the banking system and its opacity as it increases in size. “The empirical analysis in this article does not find a strong link between banking system size and the probability or output cost of a crisis, at least once the resilience of the system is taken into account,” the bank said in the article. “Establishing empirically whether banking system size is a leading indicator of banking crises is not straightforward,” it said. The banking system has undergone a dramatic shift in past 40 years, with assets rising from about 100% of GDP in 1975, the Bank of England said. It said the UK’s banking system was the largest out of Japan, the US and the 10 biggest EU economies. Nearly a fifth of global banking activity is booked in the UK, where there are 150 deposit-taking foreign branches of banks and almost 100 foreign subsidiaries from more than 50 countries.

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“Since peaking at $4.07 trillion last August, the Fed’s monetary base has been reduced by $259.2 billion as of the latest reserve reporting date on November 26, 2014.”

Keep An Eye On The Fed’s Accelerating Asset Sales (CNBC)

The U.S. monetary authorities (Fed) are stepping up the contraction of their balance sheet at a surprisingly fast pace. Since peaking at $4.07 trillion last August, the Fed’s monetary base has been reduced by $259.2 billion as of the latest reserve reporting date on November 26, 2014. More than half of these Fed asset sales occurred between the end of October and the end of November. But the balance sheet remains an impressive $3.8 trillion – a huge difference with the pre-crisis monetary base of $820-$830 billion. It is interesting to note that even at these comparatively modest amounts of high-powered money, the pre-crisis U.S. monetary policy was very expansionary: the federal funds rate was fluctuating around 3% while the inflation rate was accelerating above 4%.

Obviously, these are different times now: the U.S. financial system and the economy have changed in a rapidly evolving global context. Still, the comparison is useful because it shows how much the Fed’s balance sheet will have to adjust in the months ahead. One key aspect of that adjustment process is the Fed’s statement that interest rates will remain low well after the beginning of large liquidity withdrawals to “normalize” the policy stance. The question is: how is that possible? If the quantity of money is being reduced in as large amounts as is currently the case, would it not be normal to expect that its price (i.e., interest rate) would also have to rise? Certainly it would.

But what makes the Fed’s statement credible is the fact that huge excess reserves (money banks can use to make loans) of the U.S. banking system – $2.4 trillion at the last count – will continue to keep an extraordinarily liquid interbank market for some time. Last Friday, for example, the effective federal funds rate (overnight money banks lend to each other) closed trading at 0.11% – more than half way below the Fed’s target of 0.25%. These excess reserves are now being drained by the Fed’s bond sales; they have been cut by $286.1 billion from their peak of last August. There is still plenty of cutting to do, though. Just think that during the pre-crisis period from January 2007 to June 2008 banks’ average excess reserves were fluctuating around monthly levels of $1.9 billion (sic). That is a far cry from the $2.4 trillion we have now.

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Not exactly a new point, but ..

Bill Gross: You Can’t Cure Debt With More Debt (CNBC)

Central banks are trying to solve a debt crisis by piling on more debt, creating a “point of low return” for investors, bond guru Bill Gross said in a letter to clients. The Janus Capital portfolio manager and Pimco founder takes the Federal Reserve, Bank of Japan and European Central Bank to task for using monetary policy to make it easier for governments to run up debt, all in the hopes of stimulating anemic global growth. “How could they?” Gross asks, using nursery rhymes including the characters Punch and Judy to bemoan the possibility of “inflationary horror” that characterized the 1970s. It’s probably better to read the Gross letter in its entirety – get it here – to see how he connects the dots, but his conclusion is stark:

Ah, policymakers. Perhaps the last five years have been one giant nursery rhyme. But each of these central bankers is trying to achieve the same basic objective: Solve a debt crisis by creating more debt. Can it be done? A few years ago, I wrote that this uncommonsensical feat could be accomplished, but with a number of caveats: 1) Initial conditions must not be onerous; 2) Both monetary and fiscal policies must be coordinated and lead to acceptable structural growth rates; and 3) Private investors must continue to participate in the capital market charade that such policies produced.

Several pitfalls have occurred within each caveat, not the least of which is stagnant growth and companies using the easy money of the past six years not to propel the economy but to jack up their own stock prices and reward themselves and shareholders. At the same time, the much-awaited handoff from monetary to fiscal policy has not happened, in large part because the Fed and others have been willing to provide trillions in accommodation:

In the U.S., as elsewhere, there has been little focus on public investment and infrastructure spending. It’s been all monetary policy, all of the time, with most of the positives flowing over to markets as opposed to the real economy. The debt currently being created is not promoting real growth and solving a debt crisis – it is being used by corporations to repurchase shares and accentuate the growing inequality between the very rich and the middle class.

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” .. as Dr. Paul so clearly points out, the sole purpose of H. Res. 758 is simply a pouring of the legal foundation for something much more substantive. You see, this is how wars begin.”

The Most Essential Lesson of History That No One Wants To Admit (Beversdorf)

Ron Paul wrote an eye opening article recently about some legislation that was just signed in Congress, namely H. Res. 758. In the article Dr. Paul explains the purpose of the resolution. It’s not a new law but provides a basis of facts that will be relied on for future action. So essentially the resolution purports that Russia behaved badly in various ways and by way of signing H. Res. 758 each congressman was indicating their agreement that the propositions contained therein are factual. Now just because a group of obnoxiously arrogant A-holes stand around in a tax-revenue financed chamber and say “yeah” to several assertions does not make those assertions factual, but here in the United Orwellian States of America it kinda does. Because those assertions that were voted to be fact (similar to the First Council of Nicaea) will now be written as factual history and taught to our children as having happened that way. The very same way we all attained our ideas of American superiority.

The dishonesty and ignorance it creates is reason enough not to do such things, however, the real stinker of it is, as Dr. Paul so clearly points out, the sole purpose of H. Res. 758 is simply a pouring of the legal foundation for something much more substantive. You see this is how wars begin. And the wheels for this particular war have been in motion for many years now. We’ve been told our actions heretofore are simply a necessary response to the Ukraine situation. However, those who can objectively look at the Ukraine situation will realize the US sponsored coup in Ukraine was simply a spark to light the fuse of a much larger detonation.

Now I understand many at this point are thinking “yep another conspiracy theory, why can’t it ever just be the US government thinks what they are doing is best for Americans”? And it can, it just never is anymore and perhaps ever was. Lies are told and public opinion is manipulated. For war must be every bit good theatre in the press, as good strategy on the ground. It is the theatre that makes war so ugly. Fighting a war for what one believes in is unfortunate and brutal but fighting for lies and deceit to an end that benefits only those telling the lies is a type of ugliness most of us cannot comprehend. It is only in the world ruled by sociopaths where such things can happen.

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“No worries, Father Allen, Brother Ben and Sister Janet figured out how to turn the universe’s economic waters into wine.”

Uncork the Central Bank Bubbly (StealthFlation)

What a glorious global economic gala! Apparently, contracting world GDP growth, monumental sovereign debt loads, ballooning central bank balance sheets, crashing commodity prices, competitive currency devaluations and synthetically suppressed interest rates, as far as the eye can see, are all great tidings to be joyously celebrated throughout this holiday season. Well, at least that’s the takeaway from the whooping wonderful world of capital markets. Have no fear, all is perfectly in order. Jamie Dimon, Jim Cramer, Larry Fink and Company have our back. The rest of us mere mortals are simply supposed to stand aside and take their professional word for it, silently sipping the financial establishment’s spiked eggnog until we attain a sheepish state of stupid stupor. After all, the money experts at the Fed are on the case, what could possibly go wrong?

Joy to the world! es, it’s true, your Nation too can enjoy the very same blissful state of economic euphoria, all you need is the will to turn your monetary policy completely on its head, a la festive freeloading Fed. No need to maintain the integrity of your means of exchange, that’s so old school. That’s right, you too are absolutely invited to enter the ZIRP zero bound party zone, just buy out all your own newly issued treasury obligations and be sure to lap up any illiquid debt that may be languishing. Set it and forget it, that’s it, nothing to it. In the end, it will all take care of itself according to the all knowing fabulous Fed heads and the crazed Keynesian collegiate kooks that orchestrated and obliged this opulent banker blowout. No worries, Father Allen, Brother Ben and Sister Janet figured out how to turn the universe’s economic waters into wine.

Oh, there is one important caveat which needs to be pointed out, along with the monetary ecstasy ease regime, your Nation is also required to unequivocally serve the United States’ geopolitical ambitions and global economic interests, otherwise, no monetary marmalade for you! Just ask Vlad on that score. His toast is badly burnt, his olive oil spread is spoiled, and his Ruble is now rubble. No money honey for comrade Putin until he bows down to the high and mighty masters of the badass bully banking USD monetary system hegemony.

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Wealth inequality is a symptom. Power inequality is the disease.

Taming Corporate Power: The Key Political Issue Of Our Age (Monbiot)

Does this sometimes feel like a country under enemy occupation? Do you wonder why the demands of so much of the electorate seldom translate into policy? Why parties of the left seem incapable of offering effective opposition to market fundamentalism, let alone proposing coherent alternatives? Do you wonder why those who want a kind and decent and just world, in which both human beings and other living creatures are protected, so often appear to be opposed by the entire political establishment? If so, you have encountered corporate power – the corrupting influence that prevents parties from connecting with the public, distorts spending and tax decisions, and limits the scope of democracy.

It helps explain the otherwise inexplicable: the creeping privatisation of health and education, hated by the vast majority of voters; the private finance initiative, which has left public services with unpayable debts; the replacement of the civil service with companies distinguished only by incompetence; the failure to re-regulate the banks and collect tax; the war on the natural world; the scrapping of the safeguards that protect us from exploitation; above all, the severe limitation of political choice in a nation crying out for alternatives. There are many ways in which it operates, but perhaps the most obvious is through our unreformed political funding system, which permits big business and multimillionaires in effect to buy political parties. Once a party is obliged to them, it needs little reminder of where its interests lie. Fear and favour rule.

And if they fail? Well, there are other means. Before the last election, a radical firebrand said this about the lobbying industry: “It is the next big scandal waiting to happen … an issue that exposes the far-too-cosy relationship between politics, government, business and money … secret corporate lobbying, like the expenses scandal, goes to the heart of why people are so fed up with politics.” That, of course, was David Cameron, and he’s since ensured that the scandal continues. His Lobbying Act restricts the activities of charities and trade unions but imposes no meaningful restraint on corporations.

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Dec 072014
 
 December 7, 2014  Posted by at 8:39 pm Finance Tagged with: , , , ,  


John Vachon Big Four Cafe, Cairo, Illinois May 1940

The wider impact of plummeting oil prices is just now starting to be considered. Just about all ‘experts’ are way behind the curve. There’s still people insisting it’s all be a big boon to all of our economies. Not here, as you know if you follow TheAutomaticEarth.com, or as you can find out by retracing us over the past 1-2 months. I said from the get go that this cannot end well. Oil is too large a part of the economy to let a 40% price drop be reason to party.

And now both the Federal Reserve and the Bank for International Settlements have clued in, with urgency, to leveraged loans, their role in CDOs, AND their link to the energy industry. And whatever we may think of either institution, when both hoot the red alarm horn at the same time, we should pay attention.

Two articles from very different sources paint the – essentially same – picture. One is from Wolf Richter, easily one of my favorite writers at the moment in this narrow financial niche of ours, and his article today does a lot to confirm that. The other is from my ‘friend’ against all odds (we never met nor communicated), Ambrose Evans-Pritchard, who proves once more what makes him, despite all else, an interesting journalist to read.

What connects the two articles is leveraged loans, which in turn are strongly linked to collateralized debt obligations (CDOs). Ambrose quotes the BIS as saying 55% of CDOs are issued based on leveraged loans, an “unprecedented level”. Which is another way of saying we’re not in Kansas anymore. While Wolf confirms that leveraged loans play a major role in the oil (re:shale) industry.

Obviously, so do junk bonds, but those don’t bother the Fed and BIS as much; they get sold to investors, mutual funds, pension funds and the like. Leveraged loans on the other hand directly impact major banks. And that gives grandma Yellen the ‘Janet Jitters’ (let’s remember that term). For good reason: the Fed can’t buy oil, but its owner banks are hugely exposed to it.

This is what makes the falling oil prices so dangerous. As I must have said a million times in just the past few weeks, it’s not about the energy, it’s about the money. And this time around, I don’t have to do much writing, I laid plenty groundwork recently, and now the story tells itself. Apologies for the long quotes, I deleted what I thought was suitable. So first, here’s Wolf:

Oil, Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next

The price of oil has plunged nearly 40% since June to $65.63, and junk bonds in the US energy sector are getting hammered, after a phenomenal boom that peaked this year. Energy companies sold $50 billion in junk bonds through October, 14% of all junk bonds issued! But junk-rated energy companies trying to raise new money to service old debt or to fund costly fracking or off-shore drilling operations are suddenly hitting resistance.

And the erstwhile booming leveraged loans, the ugly sisters of junk bonds, are causing the Fed to have conniptions. Even Fed Chair Yellen singled them out because they involve banks and represent risks to the financial system. Regulators are investigating them and are trying to curtail them through “macroprudential” means, such as cracking down on banks, rather than through monetary means, such as raising rates. And what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.

This monthly chart by S&P Capital IQ’s LeveragedLoan.com shows the leveraged loan index for the oil and gas sector. Earlier this year, when optimism about the US shale revolution was still defying gravity, these loans were trading at over 100 cents on the dollar. In July, when oil began to swoon, these loans fell below 100 cents on the dollar. The trend accelerated during the fall. And in November, these loans dropped to around 92 cents on the dollar.

How bad is it? The number of leveraged loans in the oil and gas sector trading between 80 and 90 cents on the dollar (blue line in the chart below) has soared parabolically from 0% in September to 40% now. These loans are now between 10% and 20% in the hole! And some leveraged loans are now trading below 80 cents on the dollar:

“If oil can stabilize, the scope for contagion is limited,” Edward Marrinan, macro credit strategist at RBS Securities, told Bloomberg. “But if we see a further fall in prices, there will have to be a reaction in the broader market as problems will spill out and more segments of the high-yield space will feel the pain.”

Oil and gas stocks are bleeding: the Energy Select Sector ETF is down 21% from June; S&P International Energy Sector ETF down 29% and the Oil & Gas Equipment & Services ETF down 42% from early July. Smaller drillers are in trouble. All of them had horrific single-day plunges, some over 30%, on “Black Friday” after OPEC’s Thanksgiving decision [..] Traders who tried to catch these stocks have gotten their fingers sliced off since then:

Goodrich Petroleum -88% since June. Energy XXI -86% since June. Sanchez Energy -78% since June. Oasis Petroleum -75% since July. Etc.

These are the very companies that benefited during the crazy good times from yield-desperate investors who’d been driven to obvious insanity by the Fed’s interest rate repression. These investors – such as your bond mutual fund or your pension fund – loaded up on energy junk bonds and leveraged loans. And now the Fed-inspired financial house, where all risks have been eliminated by QE Infinity and ZIRP, is rediscovering risk. Turns out, the Fed, so ingeniously prolific in buying financial assets to inflate their prices, can’t buy oil.

Unless a miracle happens that will goose the price of oil pronto, there will be defaults, and they will reverberate beyond the oil patch. [..] even the 43 largest, most diversified players in the energy sector that are part of the S&P 500 are grappling with the new reality: analysts chopped earnings estimates by 20.5% since September 30, according to FactSet.

As of Friday, analysts expected the energy sector to report a 13.7% drop in revenues. At the beginning of the quarter, they’d expected a decline of only 1.7%, though oil prices had been plunging for three months. And they now expect a 14.6% swoon in earnings, as opposed to the 6.6% gain they still saw at the beginning of the quarter.

All of the energy companies in the S&P 500 got their EPS estimates decimated, even the biggest ones: Exxon Mobil by 20%, Chevron by 25%, Hess by 47%, Murphy Oil by 50%, and Marathon Oil by 63%.

And then Ambrose comes in from a completely different angle, to tell basically the exact same story. The overlords of finance are nervous and worried, and limited in the scope of their possible remedies. But I bet you, the Fed will still raise rates. With ‘official’ US jobless rates at 5.8%, they must, or they lose all credibility. And besides, don’t forget that Wall Street banks need higher rates now more than ever, never mind the real economy, exactly because of leveraged loans. Hey, amigo, everybody’s in oil!

Dollar Surge Endangers Global Debt Edifice, Warns BIS

Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world’s financial stability, the Bank for International Settlements has warned. The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at an annual rate of 47%. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars.

A chunk of China’s borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s [..]”To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns,” said the BIS in its quarterly report. “More than a quantum of fragility underlies the current elevated mood in financial markets,” it warned.

[..] Some of the violent moves lately go beyond stress seen in earlier crises, a sign that markets may be dangerously stretched and that many fund managers do not really believe their own Goldilocks narrative. “Mid-October’s extreme intraday price movements underscore how sensitive markets have become to even small surprises. On 15 October, the yield on 10-year US Treasury bonds fell almost 37 basis points, more than the drop on 15 September 2008 when Lehman Brothers filed for bankruptcy.”

The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said.

BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar.

The role of the US dollar is crucial in all this. If and when you see that “cross-border lending in dollars has tripled to $9 trillion in a decade“, you must recognize that you might as well forget about the demise of the greenback for the time being.

The dollar index (DXY) has surged 12% since late June to 89.36, smashing through its 30-year downtrend line. [..] Hyun Song Shin, the BIS’s head of research, said the world’s central banks still hold over 60% of their reserves in dollars. This ratio has changed remarkably little in 40 years, but the overall level has soared – from $1 trillion to $12 trillion just since 2000.

Cross-border lending in dollars has tripled to $9 trillion in a decade. Some $7 trillion of this is entirely outside the American regulatory sphere. “Neither a borrower nor a lender is a US resident. The role that the US dollar plays in debt contracts is very important. It is a global currency, and no other currency has this role,” he said.

The implication is that there is no lender-of-last resort standing behind trillions of off-shore dollar bank transactions. This increases the risks of a chain-reaction if it ever goes wrong. China’s central bank has ample dollar reserves to bail out its companies – should it wish to do so – but the jury is out on Brazil, Russia, and other countries. This flaw in the global system may be tested as the Fed prepares to raise interest rates for the first time in seven years. [..] The Fed’s new “optimal control” model suggests that rates may rise sooner and faster than markets expect. This has the makings of a global shock.

The great unknown is whether the current cycle of Fed tightening will lead to the same sort of stress seen in the Latin American debt crisis in the early 1980s or the East Asia/Russia crisis in the late 1990s. This time governments have far less dollar debt, but corporate dollar debt has replaced it, with mounting excesses in the non-bank bond markets. Emerging market bond issuance in dollars has jumped by $550bn since 2009. [..].. the weak links may not be where we think they are [..] the new threat may lie in non-leveraged investments by asset managers and pension funds funnelling vast sums of excess capital around the world, especially into emerging markets.

They engage in clustering and crowd behaviours, and are apt to pull-out en masse, risking a bad feedback-loop. This could prove to be today’s systemic danger. [..] [The BIS] now warns that the world is in many ways even more stretched today than it was in 2008 [..]

This is the story of today. Oil is everywhere. In all aspects of our lives. If oil prices suddenly move up a lot, people driving cars get hit, bad for the economy. If they move down much, the industry gets hit, jobs are lost, also bad for the economy. And everyone’s invested in that industry, whether they know it or not. We simply can’t afford $40 oil anymore than we can $200 oil; that is, in the short term. Our pensions funds, mutual funds and especially our banks are too heavily invested in it. Let alone our governments.

Falling oil prices are not just set to create future mayhem, they’re doing it now, you ain’t seen nothing yet. Much of the industry itself is scrambling to stay alive, many parties won’t make it if prices stay low or go lower, and the financial world, including your pension funds and mutual funds, will go south with it.