Nov 132017
 
 November 13, 2017  Posted by at 9:42 am Finance Tagged with: , , , , , , , , , ,  6 Responses »
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Mark Twain in Nikola Tesla’s lab 1894

 

John Hussman Forecasts A Decade Of Stock Losses (BI)
One In Five American Households Have ‘Zero Or Negative’ Wealth (MW)
Top Tech Stocks’ $1.7 Trillion Gain Eclipses Canada’s Economy (BBG)
Bitcoin Plunges 29% From Record High (BBG)
The End Of “The End Of History” (Luongo)
Warnings From the “China Beige Book” (Rickards)
UK Government Tensions Rise After Leak Of ‘Orwellian’ Memo Sent To May (G.)
More Than A Third Of UK Home Sellers Cut Asking Price (G.)
Fossil Fuel Burning Set To Hit Record High In 2017 (G.)
The Decisions Behind Monsanto’s Weed-Killer Crisis (R.)
Weed-Killer Prompts Angry Divide Among US Farmers (AFP)
Millions On Brink Of Famine In Yemen As Saudi Arabia Tightens Blockade (G.)

 

 

Big fall, big rise and an even bigger fall.

John Hussman Forecasts A Decade Of Stock Losses (BI)

As the equity bull market has climbed into rarefied air, investors have continuously come up with new ways to rationalize the rally. Right now, they like to cite earnings growth, which has expanded for several quarters after a prolonged rough patch. They also frequently mention interest rates that, despite hawkish signals from central banks, have remained low, supplying the market with a seemingly endless supply of cheap money. On the other side of the spectrum, John Hussman, the president of the Hussman Investment Trust and a former economics professor, thinks that the investment community is unwisely ignoring the most stretched valuations in history on the heels of a nearly 300% bull market run. Ever the outspoken bear, Hussman says investors are being willfully ignorant, which has stocks at risk of a drop that could reach 63% and send the market spiraling into a full decade of negative returns.

It wouldn’t be the first time in history this has happened. But Hussman thinks this crash will be different, because the reasons for market instability are “purely psychological” this time around, according to a recent blog post. At the root of Hussman’s pessimistic market view are stock valuations that look historically stretched by a handful of measures. According to his preferred valuation metric — the ratio of non-financial market cap to corporate gross value-added (Market Cap/GVA) — stocks are more expensive than they were in 1929 and 2000, periods that immediately preceded major market selloffs. “US equity market valuations at the most offensive levels in history,” he wrote in his November monthly note. “We expect that more extreme valuations will only be met by more severe losses.”

Those losses won’t just include the 63% plunge referenced above – it’ll also be accompanied by a longer 10 to 12 year period over which the S&P 500 will fall, says Hussman. He cites the chart below, which shows how closely 12-year expected returns for the benchmark have historically tracked Market Cap/GVA, which is shown in inverted fashion. Note that the expected trajectory for Market Cap/GVA shows the S&P 500 veering into negative territory. The psychology behind the market’s willingness to accept lofty stock valuations stems from the flawed rationale that prices are justified by low interest rates, says Hussman. To him, the US economy is growing too slowly for this to be true, and that any belief to the contrary gives people false confidence.

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While other reports say some 70% live paycheck to paycheck. Which one is true? At least it should be clear that the US is not doing well at all.

One In Five American Households Have ‘Zero Or Negative’ Wealth (MW)

Millions of Americans are living on the edge. One in five households has zero or negative wealth, according to a report released this week by the Institute for Policy Studies, a progressive think tank based in Washington, D.C. What’s more, an even greater share of African-American (30%) and Latino (27%) households are “underwater” financially. The combined impact of $1 trillion in credit-card debt, $1.4 trillion in student loan debt, and stagnant wages are taking a toll. U.S. homes have regained value since the Great Recession, but many households have not. “Millions of American families struggle with zero or negative wealth, meaning they owe more than they own,” the report found. “This means that they have nothing to fall back on if an unexpected expense comes up like a broken down car or illness.” And inequality could get worse through new tax cuts for the wealthy.

President Trump’s tax proposals won’t give America’s middle class the reprieve they need to grow their wealth and recover from the financial crash, said Josh Hoxie, who heads up the Project on Opportunity and Taxation at the Institute for Policy Studies. A recent analysis by the Joint Committee on Taxation concluded that taxes would decline for all income groups, with the biggest percentage-point decline for millionaires. After-tax income would rise by nearly 7% for households earning over $1 million per year, compared to less than 2% for those earning between $50,001 and $1 million, as MarketWatch recently reported. And less than 1% for those earning less than $50,000, according to Ernie Tedeschi, an economist at Evercore IS investment banking advisory firm who worked in the Treasury Department under President Obama.

Looking at private income, such as earnings and dividends, and government benefits like Social Security, the income of families near the top increased roughly 90% from 1963 to 2016, while the income of families at the bottom rose less than 10%, according to a separate report released last month by the Urban Institute, a nonprofit policy group based in Washington, D.C., while most other groups have been left behind. And that gap between rich and poor is only going to get worse, Hoxie said. The wealthiest 25 individuals in the U.S., including co-founder Bill Gates, Amazon CEO Jeff Bezos and Facebook CEO Mark Zuckerberg, own $1 trillion in combined assets. These 25 — a group equivalent to the active roster of a major league baseball team — hold more wealth than the bottom 56% of the U.S. population.

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Completely nuts.

Top Tech Stocks’ $1.7 Trillion Gain Eclipses Canada’s Economy (BBG)

Between the FAANG quintet and China’s rivaling BAT companies, gains in the world’s top technology shares are nearing a whopping $1.7 trillion in market value this year. That’s more than Canada’s entire economy, and exceeds the worth of Germany’s biggest 30 companies put together. The eight tech giants – Facebook, Amazon, Apple, Netflix and Google parent Alphabet, as well as their Asian peers Baidu, Alibaba and Tencent – have amassed as much money in 2017 as PIMCO, one of the world’s biggest fund managers, has done in about 46 years. While the stocks have seen a meteoric rise this year, their combined market value came off highs last week amid a global selloff in which the year’s high flyers had a bigger retreat. A recent breakdown in the correlation between high-yield bonds and the tech-heavy Nasdaq 100 Index suggests the slide in junk may spread further.

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Confidence.

Bitcoin Plunges 29% From Record High (BBG)

Bitcoin plunged as the cancellation of a technology upgrade prompted some users to switch out of the cryptocurrency, spooking speculators who had profited from a more than 800% surge this year. The cryptocurrency has dropped 9.5% since late Friday, extending its slide from last week’s record to as much as 29%, according to data compiled by Coinmarketcap.com and Bloomberg. Bitcoin cash, a rival that split from the original bitcoin in August, has jumped nearly 40% since Friday. Bitcoin cash is gaining popularity because of its larger block size, a characteristic that makes transactions cheaper and faster than the original. When a faction of the cryptocurrency community canceled plans to increase bitcoin’s block size on Wednesday – a move that would have created another offshoot – some supporters of bigger blocks rallied around bitcoin cash.

The resulting volatility has been extreme even by bitcoin’s wild standards and comes amid growing interest in cryptocurrencies among regulators, banks and fund managers. While skeptics have called bitcoin’s rapid advance a bubble, it has become too big for many on Wall Street to ignore. Even after shrinking by as much as $38 billion since Wednesday, bitcoin boasts a market value of $101 billion. Supporters of bitcoin’s technology upgrade “are now switching support to bitcoin cash,” said Mike Kayamori, head of Tokyo-based Quoine, the world’s second most-active bitcoin exchange over the past day. “There’s a panic about what’s happening. People shouldn’t panic. Just hold on to both coins until we see how it plays out.”

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A different view from most.

The End Of “The End Of History” (Luongo)

The path to draining the swamp is a circuitous one but, in my mind, it’s hard to argue where things are headed. They are not headed towards confrontation with Iran but actually the opposite. The most rabidly anti-Iranian segment of the Saudi Royal house is impoverished and imprisoned. CNN will be sold and go out of business to allow for the Time-Warner/AT&T merger. Jeff Zucker is out. Add another scalp to Steve Bannon’s belt along with Harvey Weinstein, Kevin Spacey and so many to come. Will the vestiges of the neoconservative establishment in the U.S. and Israel continue to sabre-rattle and try to undermine what is happening? Yes.

They’ve been doing that since the day Trump was elected just over a year ago, but it hasn’t stopped the momentum. Why? Because Putin was on the job outmaneuvering them at every turn. Trump made a deal with the neocons back in August to cede them control of foreign policy and, in effect, outsourced cleaning up the Middle East to Putin. But, predictably they also didn’t follow through with their end of the bargain. Trump learned, like Putin did, the John McCain’s of the world don’t keep to their deals. They are ‘not agreement capable.’ And, as such, since the last failure to repeal Obamacare Trump has gone after every pillar of support these people had. It will end with Hillary Clinton’s indictment. But in the meantime it will look like the world is on the brink of world war.

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“Xi is ready to undertake reform of the financial system, which means shutting down insolvent companies and banks.”

Warnings From the “China Beige Book” (Rickards)

The China Beige Book, CBB, says that China had been covering up and smoothing over problems related to weak growth and excessive debt in order to provide a calm face to the world in advance of the National Congress of the Communist Party of China, which took place last month. CBB also makes it clear that the much-touted “rebalancing” of the Chinese economy away from investment and manufacturing toward consumption and spending has not occurred. Instead China has doubled down on excess capacity in coal, steel and manufacturing and has continued its policy of wasteful investment fueled with unpayable debt. It’s become obvious that the first cracks are starting to appear in China’s Great Wall of Debt. The Chinese debt binge of the past 10 years is a well-known story.

Chinese corporations have incurred dollar-denominated debts in the hundreds of billions of dollars, most of which are unpayable without subsidies from Beijing. China’s debt-to-equity ratio is over 300%, far worse than America’s (which is also dangerously high) and comparable to that of Japan and other all-star debtors. China’s trillion-dollar wealth management product (WMP) market is basically a Ponzi scheme. New WMPs are used to redeem maturing WMPs, while most of the market is simply rolled over because the underlying real estate and infrastructure projects cannot possibly repay their debts. A lot of corporate lending is simply one company lending to another, which in turns lends to another, giving the outward appearance of every company holding good assets, but in which none of the companies can actually pay its creditors.

It’s an accounting game with no real money behind it and no chance of repayment. All of this is well-known. What is not known is when it will end. When will confidence be lost in such a way that the entire debt house of cards crumbles? When will a geopolitical shock or natural disaster trigger a loss of confidence that ignites a financial panic? There was little prospect of this in the past year because President Xi Jinping was keeping a lid on trouble before the recently concluded National Congress of the Communist Party of China. With the congress behind him, Xi is ready to undertake reform of the financial system, which means shutting down insolvent companies and banks. Now the first bankruptcies have begun to appear.

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None of these people give one hoot about their country. They care about themselves only.

UK Government Tensions Rise After Leak Of ‘Orwellian’ Memo Sent To May (G.)

The tensions in Theresa May’s government intensified on Sunday night ahead of this week’s vital votes on the Brexit bill, as ministers accused Boris Johnson and Michael Gove of sending an “Orwellian” set of secret demands to No 10. As an increasingly weakened prime minister faces the possibility of parliamentary defeats on the bill, government colleagues have said they are aghast at the language used by the foreign secretary and the environment secretary in a joint private letter. The leaked letter – a remarkable show of unity from two ministers who infamously fell out during last year’s leadership campaign – appeared to be designed to push May decisively towards a hard Brexit and limit the influence of former remainers. It complained of “insufficient energy” on Brexit in some parts of the government and insisted any transition period must end in June 2021 – a veiled attack on the chancellor, Philip Hammond.

They urged the prime minister to ensure members of her top team fall behind their Brexit plans by “clarifying their minds” and called for them to “internalise the logic”. But the leak drew a bitter response from supporters of a soft Brexit, who suggested that May would now be forced to either discipline the pair or further weaken her position, which has already been tested by the recent resignations of Priti Patel and Michael Fallon and continuing pressure on Johnson and Damian Green. One cabinet minister told the Guardian: “It is not surprising that they [Gove and Johnson] would express their view. But what is surprising is that they would write this down and use this kind of language in a letter to the prime minister. “Some have described it as Orwellian, and it is. It is not helpful when people try and press their views in untransparent way.”

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It’s just starting. London falling.

More Than A Third Of UK Home Sellers Cut Asking Price (G.)

More than a third of home owners trying to sell their house have been forced to reduce their asking price, with the number of price cuts at their highest level since 2012, according to Rightmove. Traditionally house sellers are often forced to cut asking prices in the pre-Christmas period but this year the nation appears to be holding a collective autumn sale, said the property website. Rightmove, which claims to list 90% of the houses being sold in the UK, said 37% of current sellers had dropped their asking price, with a typical 0.8% or £2,392 price reduction. It also warned that those who recently put their property on the market were being too optimistic by not discounting by more. The mass price cut will be seen as further evidence that the market has slowed dramatically, particularly in London where prices have been falling.

Last week the Royal Institution of Chartered Surveyors said the overall UK property market had stalled. Rics also warned that it expected the market to remain subdued in the coming months as sales stay flat or fall in most regions. Rightmove director, Miles Shipside, said the slowdown in the housing market, the recent interest rate rise and the prediction that further rises were on the horizon suggested bigger reductions in house prices in the near future. “Given that the market has been price-sensitive for a while and a five-year high proportion of sellers are slashing their prices, some sellers and their agents are over-pricing. These sellers may well be asking themselves if they could have saved some time and stress by pricing a lot more conservatively at the start.”

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As you’re being pleasantly entertained with that dumb Paris agreement.

Fossil Fuel Burning Set To Hit Record High In 2017 (G.)

The burning of fossil fuels around the world is set to hit a record high in 2017, climate scientists have warned, following three years of flat growth that raised hopes that a peak in global emissions had been reached. The expected jump in the carbon emissions that drive global warming is a “giant leap backwards for humankind”, according to some scientists. However, other experts said they were not alarmed, saying fluctuations in emissions are to be expected and that big polluters such as China are acting to cut emissions. Global emissions need to reach their peak by 2020 and then start falling quickly in order to have a realistic chance of keeping global warming below the 2C danger limit, according to leading scientists. Whether the anticipated increase in CO2 emissions in 2017 is just a blip that is followed by a falling trend, or is the start of a worrying upward trend, remains to be seen.

Much will depend on the fast implementation of the global climate deal sealed in Paris in 2015 and this is the focus of the UN summit of the world’s countries in Bonn, Germany this week. The nations must make significant progress in turning the aspirations of the Paris deal into reality, as the action pledged to date would see at least 3C of warming and increasing extreme weather impacts around the world. The 12th annual Global Carbon Budget report published on Monday is produced by 76 of the world’s leading emissions experts from 57 research institutions and estimates that global carbon emissions from fossil fuels will have risen by 2% by the end of 2017, a significant rise.

“Global CO2 emissions appear to be going up strongly once again after a three-year stable period. This is very disappointing,” said Prof Corinne Le Quéré, director of the Tyndall Centre for Climate Change Research at the UK’s University of East Anglia and who led the new research. “The urgency for reducing emissions means they should really be already decreasing now.” “There was a big push to sign the Paris agreement on climate change but there is a feeling that not very much has happened since, a bit of slackening,” she said. “What happens after 2017 is very open and depends on how much effort countries are going to make. It is time to take really seriously the implementation of the Paris agreement.” She said the hurricanes and floods seen in 2017 were “a window into the future”.

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Farmers are using dicamba because they get it on their crops anyway from the neighbors. There’s not much time left to stop Monsanto from effectively owning all our food.

The Decisions Behind Monsanto’s Weed-Killer Crisis (R.)

In early 2016, agri-business giant Monsanto faced a decision that would prove pivotal in what since has become a sprawling herbicide crisis, with millions of acres of crops damaged. Monsanto had readied new genetically modified soybeans seeds. They were engineered for use with a powerful new weed-killer that contained a chemical called dicamba but aimed to control the substance’s main shortcoming: a tendency to drift into neighboring farmers’ fields and kill vegetation. The company had to choose whether to immediately start selling the seeds or wait for the U.S. Environmental Protection Agency (EPA) to sign off on the safety of the companion herbicide. The firm stood to lose a lot of money by waiting.

Because Monsanto had bred the dicamba-resistant trait into its entire stock of soybeans, the only alternative would have been “to not sell a single soybean in the United States” that year, Monsanto Vice President of Global Strategy Scott Partridge told Reuters in an interview. Betting on a quick approval, Monsanto sold the seeds, and farmers planted a million acres of the genetically modified soybeans in 2016. But the EPA’s deliberations on the weed-killer dragged on for another 11 months because of concerns about dicamba’s historical drift problems. That delay left farmers who bought the seeds with no matching herbicide and three bad alternatives: Hire workers to pull weeds; use the less-effective herbicide glyphosate; or illegally spray an older version of dicamba at the risk of damage to nearby farms.

The resulting rash of illegal spraying that year damaged 42,000 acres of crops in Missouri, among the hardest hit areas, as well as swaths of crops in nine other states, according to an August 2016 advisory from the U.S. Environmental Protection Agency. The damage this year has covered 3.6 million acres in 25 states, according to Kevin Bradley, a University of Missouri weed scientist who has tracked dicamba damage reports and produced estimates cited by the EPA. The episode highlights a hole in a U.S regulatory system that has separate agencies approving genetically modified seeds and their matching herbicides.

Monsanto has blamed farmers for the illegal spraying and argued it could not have foreseen that the disjointed approval process would set off a crop-damage crisis. But a Reuters review of regulatory records and interviews with crop scientists shows that Monsanto was repeatedly warned by crop scientists, starting as far back as 2011, of the dangers of releasing a dicamba-resistant seed without an accompanying herbicide designed to reduce drift to nearby farms.

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“Farmers need it desperately,” said Perry Galloway. “If I get dicamba on (my products), I can’t sell anything,” responded Shawn Peebles.”

Weed-Killer Prompts Angry Divide Among US Farmers (AFP)

When it comes to the herbicide dicamba, farmers in the southern state of Arkansas are not lacking for strong opinions. “Farmers need it desperately,” said Perry Galloway. “If I get dicamba on (my products), I can’t sell anything,” responded Shawn Peebles. The two men know each other well, living just miles apart in the towns of Gregory and Augusta, in a corner of the state where cotton and soybean fields reach to the horizon and homes are often miles from the nearest neighbor. But they disagree profoundly on the use of dicamba. Last year the agro-chemical giant Monsanto began selling soy and cotton seeds genetically modified to tolerate the herbicide. The chemical product has been used to great effect against a weed that plagues the region, Palmer amaranth, or pigweed – especially since it became resistant to another herbicide, glyphosate, which has become highly controversial in Europe over its effects on human health.

The problem with dicamba is that it vaporizes easily and is carried by the wind, often spreading to nearby farm fields – with varying effects. Facing a surge in complaints, authorities in Arkansas early this summer imposed an urgent ban on the product’s sale. The state is now poised to ban its use between April 16 and October 31, covering the period after plants have emerged from the soil and when climatic conditions favor dicamba’s dispersal.

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This is who we are. This is caused by people we support, that we call our friends.

Millions On Brink Of Famine In Yemen As Saudi Arabia Tightens Blockade (G.)

Abdulaziz al-Husseinya lies skeletal and appears lifeless in a hospital in Yemen’s western port city of Hodeidah. At the age of nine, he weighs less than one and a half stone, and is one of hundreds of thousands of children in the country suffering from acute malnutrition. Seven million people are on on the brink of famine in war-torn Yemen, which was already in the grip of the world’s worst cholera outbreak when coalition forces led by Saudi Arabia tightened its blockade on the country last week, stemming vital aid flows. Al-Thawra hospital, where Abdulaziz is being treated, is reeling under the pressure of more than two years of conflict between the Saudi-led coalition and Iranian-allied Houthi rebels. Its corridors are packed, with patients now coming from five surrounding governorates to wait elbow-to-elbow for treatment.

Less than 45% of the country’s medical facilities are still operating – most have closed due to fighting or a lack of funds, or have been bombed by coalition airstrikes. As a result, Al-Thawra is treating some 2,500 people a day, compared to 700 before the conflict escalated in March 2015. [..] Aid agencies are now warning that Yemen’s already catastrophic humanitarian crisis could soon become a “nightmare scenario” if Saudi Arabia does not ease the blockade of the country’s land, sea and air ports – a move that the kingdom insists is necessary after Houthi rebels fired a ballistic missile towards Riyadh’s international airport this month. United Nations humanitarian flights have been cancelled for the past week and the International Committee of the Red Cross (ICRC), along with Médecins Sans Frontières (MSF), have been prevented from flying vital medical assistance into the country.

More than 20 million Yemenis – over 70% of the population – are in need of humanitarian assistance that is being blocked. Following international pressure, the major ports of Aden and Mukalla were reopened last week for commercial traffic and food supplies, along with land border crossings to neighbouring Oman and Saudi Arabia, but humanitarian aid and aid agency workers remained barred from entering the country on Sunday. UN aid chief Mark Lowcock has said if the restrictions remain, Yemen will face “the largest famine the world has seen for many decades, with millions of victims”.

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Jun 252016
 
 June 25, 2016  Posted by at 8:26 am Finance Tagged with: , , , , , , , ,  3 Responses »
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Harris&Ewing Underwood Typewriter Co., Washington, DC 1919

World’s 400 Richest People Lose $127 Billion on Brexit (BBG)
Global Markets Lose $2.1 Trillion In Brexit Rout (AFP)
[Friday Was] The Appetizer For Monday (ZH)
Alan Greenspan Says Brexit Is The ‘Tip Of The Iceberg’ For Europe (MW)
Bravo Brexit! (David Stockman)
The Sky Has Not Fallen After Brexit But We Face Years Of Hard Labour (AEP)
They Got It Wrong: Swarms of Global Chatterers Misread Brexit (BBG)
UK ‘Leave’ Vote Deflates Hopes For TTIP (R.)
Chinese Bankruptcies Surge More Than 50% In Q1; Worse To Come (ZH)
A Look At The Global Economic Malaise Through Deutsche Bank (MW)
Electoral Surge Of Far Left Likely To Shake Up Spanish Politics (R.)
Regling: Varoufakis’ FinMin Tenure Cost Greece €100 Billion (Kath.)
Hillary Clinton Adopts The Shorthand Of The Hyperinflation Fearmongers (Dayen)
Rural Pennsylvanians Say Fracking ‘Just Ruined Everything’ (CPI)
Italy Coastguard Rescues 7,100 In Mediterranean In Two Days (G.)

Try and feel sorry. I dare you.

World’s 400 Richest People Lose $127 Billion on Brexit (BBG)

The world’s 400 richest people lost $127.4 billion Friday as global equity markets reeled from the news that British voters elected to leave the European Union. The billionaires lost 3.2% of their total net worth, bringing the combined sum to $3.9 trillion, according to the Bloomberg Billionaires Index. The biggest decline belonged to Europe’s richest person, Amancio Ortega, who lost more than $6 billion, while nine others dropped more than $1 billion, including Bill Gates, Jeff Bezos and Gerald Cavendish Grosvenor, the wealthiest person in the U.K.

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Meaningless. If the euro loses against the dollar, what is lost exactly? Besides, it’s all virtual overkill anyway.

Global Markets Lose $2.1 Trillion In Brexit Rout (AFP)

Britain’s shock vote to pull out of the European Union wiped $2.1 trillion from global equity markets Friday as traders panicked in the face of a new threat to the global economy. Investors fled to the safety of gold, the yen and blue-chip bonds as the seismic shift in the structure of Europe left many huge questions hanging, including who will lead Britain following the resignation of Prime Minister David Cameron. The Brexit vote sparked 8% losses in the Tokyo and Paris bourses, nearly 7% in Frankfurt and more than 3% in London and New York. Central banks stepped in to bolster confidence, promising to inject liquidity where needed and appearing to mitigate some of the sharpest losses.

Still, the pound crashed 10% to a 31-year low at one point, before rebounding slightly for a 9.1% loss against the greenback in late trade. The euro also plummeted, dropping 2.6% on the dollar. Benefitting from a massive safety selloff, gold jumped nearly 5% and the yen surged 4.2% against the dollar and 7.0% on the euro. The dollar at one point fell below 100 yen for the first time since November 2013. US 10-year treasury bond yields hit their lowest since 2012 at 1.42% before edging higher, while the German 10-year bund fell into negative territory for the second time in history.

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Try Italian banks: “..Monday is where we’re going to see a truer-look at “where the bodies are buried” and a more accurate “price discovery” process than what we’re seeing today..”

[Friday Was] The Appetizer For Monday (ZH)

RBC’s Charlie McElligott: “I do feel that Monday is where we’re going to see a truer-look at “where the bodies are buried” and a more accurate “price discovery” process than what we’re seeing today (as we’re washing out all the delta one flows which are dwarfing client trading)…lots of discipline being displayed thus far, with low turnovers and folks not chasing.

FTSE (UKX, benchmark equities index) is an absolute CHAMP right, trading -8.7% within the first 10 minutes of the open before clawing-back to all but -1.9% at ‘highs.’ Wrap your head around this: week-to-date, UKX is up over 2.8%! What’s the driver of today’s massive rally? People are getting their arms around the impact of this extraordinarily weak Sterling as a backdoor stimulus for exporters (ironic the power of what a departure from the EU can do vs what x # of kagillions of QE purchases couldn’t get done) and the inevitable rate cut from the BoE.

What I have to continue keeping one eyeball on is SX7E (EU banks index); the thing cannot get off mat. And if that can’t get off the mat, peripheries (and their sovereign debt) won’t either, as we re-enter the EU-crisis-era “Doom Loop” where widening sovereign spreads drag down the banks who are stuffed to the gills with them….vicious cycle, what else is new. FWIW, as I write and we’ve had this massive bounce in equities, Italian stocks (FTSEMIB) are back at their lows. This will likely be the next “hot zone” as we begin playing EU existential dominos (Spanish elections Sunday too).

My model Equity L/S portfolio is -285bps today. That is NOT cool. Elsewhere, from a thematic or factor perspective, we see the implications we spoke about earlier of the RAGINGLY STRONGER DOLLAR smashing the reflation / cyclical beta trade (value, energy, beta all struggling, while momentum mkt neutral works with defensive longs + and fins / biotech / energy -)”

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Of his own making.

Alan Greenspan Says Brexit Is The ‘Tip Of The Iceberg’ For Europe (MW)

The global economy is suffering from even bigger woes than the decision by U.K. voters to leave the European Union, Former Federal Reserve Chairman Alan Greenspan said Friday. ”This is just the tip of the iceberg,” Greenspan said in an interview on CNBC. “The global economy is in real serious trouble.” The rejection of British voters of the status quo in Europe was fueled by a “massive slowing” in the growth rate of real incomes that is widespread across Europe, Greenspan said. This, he said, is creating serious political problems that are not easy to resolve. Behind the slowdown in income is the sharp drop in worker productivity, according to Greenspan. Governments have to cut entitlements to reflect this weakness, he said.

The biggest concern is not a recession, but stagnation, the former Fed chief said. “The euro-area…is failing,” Greenspan said. “Greece is in real serious trouble and it is not going to continue in the euro very much longer irrespective of what is going on currently,” he said. Asked what he would do if he was still Fed chief, Greenspan said: “I would worry.” “This is the worst period I recall since I’ve been in public service,” he said. “There is nothing like it,” he said, including the 23% drop in the Dow Jones Industrial Average on a single day in October 1987.

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“..there will be payback, clawback and traumatic deflation of the bubbles. Plenty of it, as far as the eye can see.”

Bravo Brexit! (David Stockman)

At long last the tyranny of the global financial elite has been slammed good and hard. You can count on them to attempt another central bank based shock and awe campaign to halt and reverse the current sell-off, but it won’t be credible, sustainable or maybe even possible. The central banks and their compatriots at the EU, IMF, White House/Treasury, OECD, G-7 and the rest of the Bubble Finance apparatus have well and truly over-played their hand. They have created a tissue of financial lies; an affront to the very laws of markets, sound money and capitalist prosperity. So there will be payback, clawback and traumatic deflation of the bubbles. Plenty of it, as far as the eye can see.

On the immediate matter of Brexit, the British people have rejected the arrogant rule of the EU superstate and the tyranny of its unelected courts, commissions and bureaucratic overlords. As Donald Trump was quick to point out, they have taken back their country. He urges that Americans do the same, and he might just persuade them. But whether Trumpism captures the White House or not, it is virtually certain that Brexit is a contagious political disease. In response to today’s history-shaking event, determined campaigns for Frexit, Spexit, NExit, Grexit, Italxit, Hungexit and more centrifugal political emissions will next follow. Smaller government – at least in geography – is being given another chance. And that’s a very good thing because more localized democracy everywhere and always is inimical to the rule of centralized financial elites.

The combustible material for more referendums and defections from the EU is certainly available in surging populist parties of both the left and the right throughout the continent. In fact, the next hammer blow to the Brussels/German dictatorship will surely happen in Spain’s general election do-over on Sunday (the December elections resulted in paralysis and no government). When the polls close, the repudiation of the corrupt, hypocritical lapdog government of Prime Minister Rajoy will surely be complete. And properly so; he was just another statist in conservative garb who reformed nothing, left the Spanish economy buried in debt and gave false witness to the notion that the Brussels bureaucrats are the saviors of Europe. So the common people of Europe may be doubly blessed this week with the exit of both David Cameron and Mariano Rajoy. Good riddance to both.

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“..It was the first episode of a pan-Europe uprising against the Caesaropapism of the EU Project and its technocrat priesthood.”

The Sky Has Not Fallen After Brexit But We Face Years Of Hard Labour (AEP)

It is time for Project Grit. We warned over the final weeks of the campaign that a vote to leave the EU would be traumatic, and that is what the country now faces as markets shudder and Westminster is thrown into turmoil. The stunning upset last night marks a point of rupture for the post-war European order. It will be a Herculean task to extract Britain from the EU after 43 years enmeshed in a far-reaching legal and constitutional structure. Scotland and Northern Ireland will now be ejected from the EU against their will, a ghastly state of affairs that could all too easily lead to the internal fragmentation of the Kingdom unless handled with extreme care. The rating agencies are already pricing in a different British destiny. Standard & Poor’s declared that Brexit “spells the end” of the UK’s AAA status.

The only question is whether the downgrade is one notch or two, and that hangs on Holyrood. Moody’s has cocked the trigger too. Just how traumatic Brexit will be depends on whether Parliament can rise to the challenge and fashion a credible trade policy – so far glaringly absent – to safeguard access to European markets and ensure the viability of the City, and it depends exactly how Brussels, Berlin, Paris, Rome, Madrid, and Warsaw react once the dust settles. Both sides are handling nitroglycerin. Angry reproaches are flying in all directions, but let us not forget that the root cause of this unhappy divorce is the conduct of the EU elites themselves. It is they who have pushed Utopian ventures, and mismanaged the consequences disastrously.

It is they who have laid siege to the historic nation states, and who fatally crossed the line of democratic legitimacy with the Lisbon Treaty. This was bound to come to a head, and now it has. The wild moves in stocks, bonds, and currencies this morning were unavoidable, given the positioning of major players in the market, and given that the Treasury, the IMF, and the Davos brotherhood have been deliberately – in some cases recklessly – stirring up a mood of generalized fear.

[..] Some in Europe accuse the British people of strategic nihilism, of setting in motion the disintegration of the EU. It is true that French, Dutch, Italian, and Swedish eurosceptics are now agitating even more loudly for their own referenda, but voters are rising up across the EU in defence of national self-government and cultural ‘terroir’ for parallel reasons. Brexit is not the cause and this is not contagion. The latest PEW survey shows that anger with Brussels is just as great in most of Northwest Europe as it is Britain, and in France it is higher at 61pc. This referendum was never a fight between Britain and Europe, as so widely depicted. It was the first episode of a pan-Europe uprising against the Caesaropapism of the EU Project and its technocrat priesthood. It will not be the last.

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No-one got it more wrong than the bookmakers. At least, what they said.

They Got It Wrong: Swarms of Global Chatterers Misread Brexit (BBG)

A global cohort said before Thursday’s Brexit vote that Britain was unlikely to pull out of the European Union, the post-World War II international project that brought an unprecedented era of prosperity and peace. Yet some were led astray by the belief that free trade’s money and material goods outweighed nationalism and the tug of nostalgia. Conservative U.K. Prime Minister David Cameron called the referendum, presumably confident he would win. He lost, and he’s now resigning. “Brits don’t quit,” Cameron said in an impassioned plea on Tuesday to voters to support remaining in the EU. “We get involved, we take a lead, we make a difference, we get things done.” The Brits quit.

Opinion polls on Brexit were all over the place; the theoretical lead had changed hands dozens of times since September, although “leave” never reached 50% support. Still, betting odds put the chance of remaining at 90% as the polls closed on Thursday. Ladbrokes was offering 4-to-1 on a leave vote, according to The Guardian. Even though most players in the market were actually backing leave, more money was bet on remain by the affluent, who were generally behind staying, Matthew Shaddick, head of political betting at Ladbrokes, wrote in a blog post. Bookies are trying to make money, not help people forecast results, so the vote worked out fine for Ladbrokes, he said.

“Is this just one of the inevitable, normal occasions where an outsider wins, or a fatal blow to the idea of betting markets as being a useful forecasting tool?” Shaddick said. “Maybe unsurprisingly, I tend to think the former, but that doesn’t mean we don’t have to reflect on all of their potential flaws and decide how we best interpret them in the future.” The London-based Political Studies Association surveyed members, journalists, academics and pollsters from May 24 to June 2. Every group got it wrong. Overall, 87% of respondents said Britain was more likely to stay in the EU, 5% said it was likely to leave, and 8% said both sides had an exactly equal chance. The predicted probability of Britain voting to leave the EU: academics, 38%; pollsters, 33%; journalists, 32%; other, 38%; mean, 38%.

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The advantages keep coming in.

UK ‘Leave’ Vote Deflates Hopes For TTIP (R.)

Britain’s looming exit from the European Union is another huge setback for negotiations on a massive U.S.-EU free trade deal that were already stalled by deeply entrenched differences and growing anti-trade sentiment on both sides of the Atlantic. The historic divorce launched by Thursday’s vote will almost certainly further delay substantial progress in the Transatlantic Trade and Investment Partnership (TTIP) talks as the remaining 27 EU states sort out their own new relationship with Britain, trade experts said on Friday. With French and German officials increasingly voicing skepticism about TTIP’s chances for success, the United Kingdom’s departure from the deal could sink hopes of a deal before President Barack Obama leaves office in January.

“This is yet another reason why TTIP will likely be postponed,” said Heather Conley, European program director at the Center for Strategic and International Studies, a think tank in Washington. “But to be honest, TTIP isn’t going anywhere, I believe, before 2018 at the earliest,” she said. U.S. Trade Representative Michael Froman said in a statement on Friday that he was evaluating the UK decision’s impact on TTIP, but would continue to engage with both European and UK counterparts. “The importance of trade and investment is indisputable in our relationships with both the European Union and the United Kingdom,” Froman said. “The economic and strategic rationale for TTIP remains strong.”

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Xi can no longer hold off the tide. Q1: what happens to the unemployed? Q2: how are the shadow banks paid off?

Chinese Bankruptcies Surge More Than 50% In Q1; Worse To Come (ZH)

Two months ago, when looking at the soaring number of bond issuance cancellations and postponements as calculated by BofA, we commented that it was only a matter of time before the long overdue tide of corporate defaults, held by for so many years by the Chinese government which would do anything to delay the inevitable, was about to be unleashed. This prediction has indeed been validated and as the FT reports overnight, Chinese bankruptcies have surged this year “as the government uses the legal system to deal with “zombie” companies and reduce industrial overcapacity as part of a broader effort to restructure the economy.”

In just the first quarter of 2016, Chinese courts have accepted 1,028 bankruptcy cases, up a whopping 52.5% from a year earlier, according to the Supreme People’s Court. Just under 20,000 cases were accepted in total between 2008 and 2015. This is surprising because while China’s legislature had approved a modern bankruptcy law in 2007 it had barely been used for years, with debt disputes often handled through backroom negotiations involving local governments. “Bankruptcy isn’t just about creditor-borrower relations. It also touches on social issues like unemployment,” said Wang Xinxin, director of the bankruptcy research centre at Renmin University law school in Beijing. “For a long time many local courts weren’t willing to accept them, or local governments didn’t let them accept.”

However, following the dramatic collapse of global commodity prices, which as we showed last October meant that more than half of local companies could not afford to even make one coupon payment with cash from operations, Beijing had no choice but to throw in the towel. And as the FT adds, “bankruptcy courts have been recruited into China’s drive for “supply-side reform”, which centres on reduction of overcapacity in sectors such as steel, coal and cement.”

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Deflation.

A Look At The Global Economic Malaise Through Deutsche Bank (MW)

I like to keep an eye on major financials, as they are the backbone of the global economy. If the banks have problems, not much else will be doing all that great from a macro perspective. I know there are serious issues with European financials, as collapsing (and in some cases negative) government-bond yields, coupled with negative short-term policy rates, have basically shrunk their net-interest margins as their loans are priced off those rates. The same is the case in Japan. In the U.S, despite a massive flattening of the Treasury yield curve, we have so far been spared from this rather unfortunate banking situation.

So I punched out the ticker “DB” on my screen two Fridays ago and looked at the TV before the chart would load. I looked back at the screen, and I thought I had made a mistake as sometimes the web browser will “remember” ticker symbols on the drop-down quote menu and occasionally the wrong chart would load. It had to be a mistake, as I was looking at the 10-year Treasury yield chart that was just shown on the TV screen seconds earlier, with some futures trader making the comment that the U.S. Treasury market was “breaking out.” I looked closer, and I was stunned. There was no mistake. To that moment, I had not realized that Deutsche Bank’s stock was tracking the 10-year Treasury note yield almost tit for tat. If the Treasury market is breaking out, that would mean Deutsche Bank stock is breaking down, I thought.

It did not take long to figure out why the stock of a major global financial firm — DB, the largest bank in Germany — would follow the 10-year U.S. Treasury yield so closely. As I have explained on numerous occasions in this column, I think we face a global deflationary problem. There are numerous implications for this, but economic growth cycles driven by too much borrowing in the developed world and in many emerging markets — the largest of which is China — are causing that mountain of debt to catch up with faltering economies. Falling long-term U.S. interest rates at a time when the Federal Reserve has not officially given up on a hopelessly-misguided rate-hiking cycle are a symptom of this global deflation.

Banks tend to perform very poorly in a deflationary environment as weak nominal corporate revenues make servicing debts problematic and lending growth tends to suffer. In a deflationary environment, the real value of debts rises as they stay nominally constant; but the assets those debts are financing tend to fall in price, causing rising non-performing loan (NPL) ratios. Combine this with the unorthodox global QE monetary policies and negative short-term interest rates, and you have collapsing net interest margins for many global banks like Deutsche Bank as many yield curves globally, including the one in Germany, have vanished.

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One more technocrat government gone on Monday?

Electoral Surge Of Far Left Likely To Shake Up Spanish Politics (R.)

The parched olive groves and tranquil towns of Spain’s southern Cordoba province are an unlikely backdrop for a political upset that could reverberate across Europe. Yet some locals like 57-year-old Lorenzo Molina, an unemployed librarian, hope they can help deliver just that in a fresh nationwide election on June 26 following an inconclusive December ballot. Gains for an anti-austerity alliance led by the young Podemos party in tightly-contested provinces like this could tip the balance in its bid to lead the next government, and this could turn Spain into the European Union’s next headache after Britain’s June 23 referendum on EU membership. A surge into second place for Unidos Podemos (“Together We Can”) ahead of Spain’s Socialists would make the far-left front a serious contender to form a coalition government, cementing the decline of Spain’s once-mighty center-left in the process.

After radical leftist Syriza’s success in crushing the social democratic Pasok in Greece, a Podemos breakthrough could also buoy euro-skeptic anti-establishment movements in the likes of Italy or France as worsening inequality fuels discontent. For Molina, a dyed-in-the-wool backer of the ex-communists now part of the leftist alliance, it’s a momentous prospect after decades on the fringes of Spanish politics, hankering after this so-called “sorpasso” (eclipse) of the Socialists. “It’s time to air things out,” Molina said on a balmy evening in the city of Cordoba, as an eclectic mix of families and people waving hammer and sickle flags arrived at a rally in a local park. “The Socialists have been in charge of our institutions for many years,” he added, as cries of “Yes we can” rang out among the crowd of several hundred.

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The cost of not doing what you’re told. Take heed, Britain and everyone else. All your base are belong to us.

Regling: Varoufakis’ FinMin Tenure Cost Greece €100 Billion (Kath.)

The cost of Yanis Varoufakis’s tenure as Greece’s Finance Minister during the January-August 2015 period was estimated at around €100 billion, Klaus Regling, head of the European Financial Stability Facility (EFSF) and first managing director of the European Stability Mechanism, told Skai TV. In the interview that aired on Wednesday, Regling noted that during the Varoufakis era, relations between Greece and its lenders were not good, that reforms were halted and that the overall situation at the time did not serve the interests of the Greek economy.

Regling also urged the current Greek government to stick to agreed reforms and noted that the next two months would see negotiations between Greece and its creditors regarding changes in the country’s labor laws, among others, before a second review of the country’s bailout program in September. Regling also argued that some members of the coalition administration did not seem committed to the bailout program, particularly with regard to privatizations and the privatization fund. On the subject of debt relief for Greece, Regling noted that the institutions had agreed on principle, but disagreed over the time frame.

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“..Alan Greenspan, former chair of the Federal Reserve, echoed Trump’s comments almost verbatim back in 2011, when the U.S. came close to reaching the debt limit. “The United States can pay any debt it has because we can always print money to do that..”

Hillary Clinton Adopts The Shorthand Of The Hyperinflation Fearmongers (Dayen)

Deficit hawks often raise the specter of hyperinflation to scare people who disagree with them. And that’s exactly what Hillary Clinton did on Tuesday. Speaking in Columbus, Clinton criticized Donald Trump for saying last month that the U.S. can never default on its debt obligations “because you print the money.” “We know what happened to countries that tried that in the past, like Germany in the ‘20s and Zimbabwe in the ‘90s,” Clinton said. “It drove inflation through the roof and crippled their economies.” But printing money — otherwise known as increasing the money supply – is a routine occurrence for governments that control their own currency.

The Federal Reserve has increased its balance sheet by over $3 trillion since the financial crisis, explicitly to support the economy. (The Fed does this by buying stocks and bonds with electronic cash that didn’t exist before.) In fact, an increasingly influential school of economics, known as Modern Monetary Theory, argues that deficit spending, including through money printing, is critical to promote full employment. Even Alan Greenspan, former chair of the Federal Reserve, echoed Trump’s comments almost verbatim back in 2011, when the U.S. came close to reaching the debt limit. “The United States can pay any debt it has because we can always print money to do that,” Greenspan told “Meet the Press.”

“If you think about it, it is precisely this power that makes U.S. Treasuries [T-Bonds] so safe in the first place,” said Stephanie Kelton, an economics professor at the University of Missouri-Kansas City and a former chief economist to Bernie Sanders on the Senate Budget Committee. Kelton is one of the leading proponents of Modern Monetary Theory. But deficit hawks – typically members of the economic elite who favor small government and correspondingly low taxes, and are terrified of the effect inflation would have on their investments and cash reserves — have repeatedly warned that these perfunctory monetary policy actions would lead to Weimar Germany-levels of chaos.

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A mess in the name of Mammon.

Rural Pennsylvanians Say Fracking ‘Just Ruined Everything’ (CPI)

Sixty years after his service in the Army, Jesse Eakin still completes his outfits with a pin that bears a lesson from the Korean War: Never Impossible. That maxim has been tested by a low-grade but persistent threat far different than the kind Eakin encountered in Korea: well water that’s too dangerous to drink. It gives off a strange odor and bears a yellow tint. It carries sand that clogs faucets in the home Eakin shares with his wife, Shirley, here in southwestern Pennsylvania. The Eakins told the state environmental agency about their bad water nearly seven years ago and hoped for a quick resolution. Like thousands of others who live in the natural gas-rich Marcellus Shale, however, they learned their hopes were misplaced.

Today, the state is still testing their water. The results of those tests will dictate whether a gas exploration and production company is held responsible for providing them with a clean supply. Meanwhile, the Eakins drink donated bottled water and in late 2014 began paying for deliveries of city water to avoid showering in contaminants such as lead and manganese. Since 2007, at least 2,800 water-related complaints have been investigated by the Pennsylvania Department of Environmental Protection’s Oil and Gas Program. Officials found ties to the drilling industry in 279. Another 500 or so cases, including the Eakins’, are open. While regulators try to catch up to natural gas exploration, some residents of the state have gone months, even years, without access to clean water at their homes.

Responding to a public-records request by the Center for Public Integrity, the Department of Environmental Protection, or DEP, provided data on 1,840 complaints lodged since 2010. More than half took longer than the agency’s target of 45 days to resolve. Almost one in 10 took more than a year. The state’s often-plodding response has left hundreds of rural Pennsylvanians in a sort of forced drought, scrambling to pay for water deliveries, seek remedies in court, take out second mortgages or even abandon their homes.

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Off the top of my head, over 150,000 landed in Italy so far this year. And Germany has a backlog of 450,000 asylum applications.

Italy Coastguard Rescues 7,100 In Mediterranean In Two Days (G.)

Ship crews have pulled more than 2,000 refugees from overcrowded boats in the Mediterranean, Italy’s coastguard has said, as people-smugglers stepped up operations during two consecutive days of good weather. More than 7,100 people have now been rescued from international waters since Thursday, many of them on the dangerous journey from Libya. Europe’s worst immigration crisis since the second world war is in its third year, and there has been little sign of any let-up in the flow of people coming from North African to Italy.

Ships belonging to Doctors without Borders, Migrant Offshore Aid Station, Italy’s navy, the EU’s border agency Frontex and the bloc’s anti-people-smuggling mission Sophia all helped take the migrants off nine boats on Friday. About 60,000 boat refugees have been brought to Italy so far this year, according to the interior ministry.

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Feb 112016
 
 February 11, 2016  Posted by at 9:56 am Finance Tagged with: , , , , , , , ,  2 Responses »
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Harris&Ewing National Capital digs out after storm Jan 14 1939

Europe Stocks Head for Worst Drop Since August as SocGen Plunges (BBG)
Hong Kong Stocks Fall 4% in Worst Start to Lunar New Year Since ’94 (BBG)
Yellen: Not Sure We Can -Legally- Do Negative Rate (CNBC)
How Low Can Central Banks Go? JPMorgan Reckons Way, Way Lower (BBG)
Kyle Bass Says China Bank Losses May Top 400% of Subprime Crisis (BBG)
Bass: China Banks May Lose 5 Times US Banks’ Subprime Losses (CNBC)
Germany’s DAX Is One Of The World’s Worst-Performing Stock Markets (BBG)
It’s A Bad Time To Be A Bank (Ind.)
European Banks Face More Energy Problems (CNBC)
Energy Debt Fuels Broader Malaise (BBG)
Is The Market In European Coco Bonds About To Pop? (Ind.)
Some Hedge Funds Want to Make Subprime Auto Loans Next Big Short (BBG)
The Mining Industry Makes Oil Giants Look Great (BBG)
Why Does the US Government Pursue Student Debtors in Prison? (BBG)
Notes from the Locked Ward (Jim Kunstler)
When Will the Rest of Europe Want Its Own ‘Brexit’? (BBG)
Will Greece Become a Refugee Bottleneck? (Spiegel)

I’d just written down as a comment on one of the other articles: “Beware French banks, and Santander et al. It’s far too quiet on that front.” And then I see this flash by at the last minute.

Europe Stocks Head for Worst Drop Since August as SocGen Plunges (BBG)

The relief rally of Wednesday stopped short, with European stocks falling for the eighth time in nine days, heading for their lowest levels since September 2013. Financial results missing projections at Societe Generale, Rio Tinto and Zurich Insurance are adding to growing concerns that the global economy is slowing down. Energy producers deepened their slide as oil fell further. The Stoxx Europe 600 Index lost 3.9% at 9:26 a.m. in London, with more than 580 of its shares slumping. Federal Reserve Chair Janet Yellen yesterday said the turbulence had “significantly” tightened financial conditions and that the central bank might delay planned interest-rate increases. That failed to halt a slide in U.S. stocks, which by the end of the day had erased all of their gains.

European shares have dropped 17% this year and reached their lowest levels since October 2013 on Feb. 9, before rebounding on Wednesday 1.9%. This week alone, the Stoxx 600 is heading for a 6.9% plunge, its worst since August 2011. With a valuation of 13.4 times estimated profits, the gauge is near a more than one-year low relative to the Standard & Poor’s 500 Index. At least four of the 10 worst-performing equity gauges among the 93 that Bloomberg tracks are from western Europe, with Germany’s DAX Index down 19% in 2016 and Italy’s FTSE MIB Index sinking 26%. While all industry groups have been suffering, banks have borne the brunt of the selloff – they’ve plunged 28% this year amid disappointing earnings results and worries over bad loans and creditworthiness. They extended their losses on Thursday, plunging 6% as a group.

European lenders are heading for their lowest levels since the beginning of August 2012 – right when they started to rally after European Central Bank President Mario Draghi pledged to save the euro. Now even speculation that he’ll step up support as soon as next month is doing little to calm the market. A measure of volatility expectations for the region’s stocks jumped 17% on Thursday, heading for its highest level since August. Societe Generale tumbled 12%, the most since 2011, after reporting that quarterly profit missed estimates as earnings at the investment bank fell and it set aside provisions for potential legal costs. While Italian and Greek lenders tumbled the most, Deutsche Bank, Credit Suisse and Standard Chartered were among the biggest decliners, down more than 6.5% each. They’re trading at their lowest prices since at least 1998.

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Beijing will need to move before the Monday Shanghai opening.

Hong Kong Stocks Fall 4% in Worst Start to Lunar New Year Since ’94 (BBG)

Hong Kong stocks headed for their worst start to a lunar new year since 1994 as a global equity rout deepened amid concern over the strength of the world economy. The Hang Seng Index slumped 3.9% as of 1:13 p.m. in Hong Kong as markets reopened following a three-day trading closure, during which the MSCI All-Country World Index dropped 2.1%. The last time the gauge fell so much on the first day of the lunar new year, investors were worried about the health of former Chinese leader Deng Xiaoping. Lenovo and energy producers led declines after crude slumped 11% during the holidays, while jeweler Chow Sang Sang slid after riots in the Mong Kok district. Hong Kong’s benchmark equity gauge tumbled 12% this year through Friday amid concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings.

Tuesday’s violence in the shopping district of Mong Kok threatens to deter mainland visitors and worsen a drop in retail sales, according to UOB Kay Hian. “You can’t avoid a drop because everywhere has come down so much during this time and the same concerns are still there – oil price, global recession,” said Steven Leung at UOB Kay Hian. “The image of Hong Kong as a metropolitan city has been hurt quite seriously” by the rioting, he said. PetroChina tumbled 5.7%, while Cnooc, China’s largest offshore oil company, dropped 6.4%. HSBC slid 5.2%, heading for a six-year low. The Hang Seng China Enterprises Index retreated 4.8%, poised for its biggest loss since August. Mainland financial markets remain closed for holidays until Monday. Plunges in crude and concerns over the perceived creditworthiness of European banks has fueled uncertainty over the strength of the world economy this week. Oil fell below $27 a barrel in New York, compared with $31.72 a barrel at the close on Feb. 4.

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Hollow: “..we certainly recognize that global market developments bear close watching,..

Yellen: Not Sure We Can -Legally- Do Negative Rate (CNBC)

As whispers mount that the Fed could implement negative interest rates as a way to goose economic activity, Chair Janet Yellen said Wednesday the central bank has not completely researched whether that would be legal. During her semiannual congressional testimony, Yellen said the Federal Open Market Committee discussed charging banks to hold excess reserves at the Fed but never fully researched the issue. “We didn’t fully look at the legal issues around that,” she said. “I would say that remains a question that we still would need to investigate more thoroughly.” Asked whether she foresees the Fed cutting rates after just hiking its interest rate target in December, Yellen said she did not expect that to happen anytime soon as she considers the risk of recession low.

“There would seem to be increased fears of recession risks that is resulting in rising in risk premia. We’ve not yet seen a sharp drop-off in growth, either globally or in the United States, but we certainly recognize that global market developments bear close watching,” she told the House Financial Services Committee. Her testimony comes as speculation grows that the Fed might consider implementing negative rates on what it pays on excess reserves. That would be one option the Fed would have should the current bout of economic softness intensify. “I do not expect the FOMC is going to be soon in the situation where it’s necessary to cut rates,” she said. “Let’s not forget, the labor market is continuing to perform well, to improve. I continue to think many of the factors holding down inflation are transitory. … We want to be careful not to jump to a premature conclusion about what’s in store for the U.S. economy.”

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No, this is no new normal, it’s still beyond crazy.

How Low Can Central Banks Go? JPMorgan Reckons Way, Way Lower (BBG)

There are “no limits” to how far central banks can ease monetary policy. That’s a recent declaration of both ECB President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda, who have joined their counterparts in Denmark, Sweden and Switzerland in embracing interest rates of less than zero. In September 2014, when the ECB’s deposit rate was minus 0.2%, Draghi was saying “now we are at the lower bound.” As recently as December, Kuroda said “we don’t think we should institute” negative rates. The rethink is global, even in places where rates are still positive.

Bank of England Governor Mark Carney conceded in November that his benchmark could fall below the current 0.5% if needed, while Federal Reserve Vice Chair Stanley Fischer said last week that negative rates were “working more than I can say that I expected in 2012.” Citigroup Inc. economist Willem Buiter says even China could shift below zero next year. The worry had been that probing below zero risked hurting the profitability of lenders, forcing them to pass on the cost to borrowers. Other fears included bank and currency runs, the hoarding of cash or gridlocked money markets. Rather than spurring lending and spending as intended, subzero rates would become more a problem than solution. Such a concern could still flare up anew given the recent selloff in global bank stocks and fretting over financial titans such as Deutsche Bank.

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As I’ve repeatedly said: “The nation’s expanding shadow banking system [..] is where the first credit problems are emerging.”

Kyle Bass Says China Bank Losses May Top 400% of Subprime Crisis (BBG)

Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis. Should the Chinese banking system lose 10% of its assets because of nonperforming loans, the nation’s banks will see about $3.5 trillion in equity vanish, Bass, the founder of Hayman Capital Management, wrote in a letter to investors obtained by Bloomberg. The world’s second-biggest economy may end up having to print more than $10 trillion of yuan to recapitalize banks, pressuring the currency to devalue in excess of 30% against the dollar, according to Bass. Bass, 46, scored big after betting against mortgages in 2007, racking up gains as the world’s largest banks wrote off more than $80 billion in subprime losses.

All his calls haven’t been as prescient. He revealed wagering on a collapse in Japan’s government-bond market in 2010, a short position that Bass later acknowledged that other bond investors had nicknamed “the widow maker.” “What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” he wrote in the letter. “Credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world.” Bass said his hedge fund has sold most of its riskier assets since the middle of last year to position itself for 18 months of “various events that are likely to transpire along this long road to a Chinese credit and currency reset.” In an e-mail, he said about 85% of his portfolio is invested in China-related trades.

“The problems China faces have no precedent,” Bass wrote in the letter. “They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.” [..] Bass estimates the Chinese economy actually expanded last year at a slower pace than reported, about 3.6%, according to the letter. He estimates that of China’s $3.2 trillion in foreign-exchange reserves, about $2.2 trillion are liquid. The banking system, which he estimates swelled 10-fold in assets over the last decade to more than $34.5 trillion, is fraught with risky products used by financial companies to skirt regulations, wrote Bass. The nation’s expanding shadow banking system – which he says has grown almost 600% in the last three years, citing UBS data – “is where the first credit problems are emerging.”

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A few more details.

Bass: China Banks May Lose 5 Times US Banks’ Subprime Losses (CNBC)

“China’s [banking] system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based on their ability to repay,” he wrote. “Instead, load decisions are political decisions made by the state.” Add to this the danger posed by China’s shadow banking system – made up of instruments Bass claimed the country’s banks used to subvert restrictions on lending – and the upshot was there were “ticking time bombs” in China’s banking system, the hedge fund manager explained. “Chinese banks will lose approximately $3.5 trillion of equity if China’s banking system loses 10% of assets,” Bass wrote. “Historically, China has lost far in excess of 10% of assets during a non-performing loan cycle.”

He noted that U.S. banks lost about $650 billion of their equity throughout the global financial crisis. The letter said that the Bank for International Settlements (BIS) estimated that Chinese banking system losses from the 1998-2001 non-performing loan cycle exceeded 30% of GDP. “We expect losses in this cycle to exceed prior cycles. Remember, 30% of Chinese GDP approaches $3.6 trillion today,” he warned. Bass wrote that he expected the massive losses to force Beijing to recapitalize Chinese banks and sharply devalue the yuan. “China will likely have to print in excess of $10 trillion worth of yuan to recapitalize its banking system,” he said. “By the time the loss cycle has peaked, we believe the renminbi will have depreciated in excess of 30% versus the U.S. dollar.”

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Is you have the likes of VW and Deutsche listed….

Germany’s DAX Is One Of The World’s Worst-Performing Stock Markets (BBG)

A one-day rebound in German shares is doing little to extinguish concerns in what has become one of the world’s worst-performing stock markets. The DAX Index has tumbled 16% this year through Wednesday, posting a loss that exceeds declines in France, the U.K. and Switzerland by as much as seven %age points. It plunged another 3.1% at 9:40 a.m. in Frankfurt. Investors are taking money out of an exchange-traded fund tracking German shares at the fastest pace since August. Fears about Deutsche Bank’s creditworthiness this week added to growing worries over a slowing global economy. Because of Germany’s close ties to China, its biggest trade partner outside of Europe, the nation stands to lose more than others in the region.

Carmakers such as BMW, Volkswagen and Daimler have already tumbled more than 23% this year on weakening demand there. “Oil and China are still on fire and a cause for concern, but we’ve got other, more broad-based fires to be watching now, and Deutsche Bank is just one of them,” said Alex Neil, EFG Bank’s head of equity and derivatives trading in Geneva. “Whichever way you look at the global economy in the next few months, there are more attractive markets than Germany.” While only about a dozen out of 93 equity gauges tracked by Bloomberg have risen this year, Germany stands out for the extent of its losses. After being some of investor’s favorites in 2015, none of the 30 DAX shares rose this year. The gauge closed 27% below its April peak on Wednesday.

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Or a shareholder. A pension fund that holds ‘secure’ stocks.

It’s A Bad Time To Be A Bank (Ind.)

It’s a bad time to be a bank. Banking stocks have lost around a quarter of their value since the start of the year. Some are now trading around lows not seen since the financial crisis. Shares in Deutsche Bank and Unicredit have been particularly hard hit as investors have lost confidence. It took reports that Deutsche Bank was considering buying back some of its own bonds on Wednesday to scrape its share price off the floor. But the extent of the losses suggests that something much bigger than a loss of confidence in one or two banks is going on.

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Beware French banks, and Santander et al. It’s far too quiet on that front.

European Banks Face More Energy Problems (CNBC)

European banks appear to face greater long-term exposure to problems in the energy sector compared to U.S. banks, many of which have already shored up capital reserves for half of their energy debt portfolio. Numerous European banks have not yet seen their borrowers draw down much of the credit that has been allotted for them, or, even more perplexing to analysts and investors, aren’t saying what their exposure to commodity-sensitive credit is, or what has already been committed. At the Credit Suisse Financial Services Conference this week in Florida, several bank executives highlighted the total exposure of their balance sheets to energy debt, but also explained what%age of that exposure is made up of outstanding paper.

Wells Fargo CFO John Shrewsberry highlighted the bank’s $42 billion in total oil and gas credit in his presentation at the conference; 41% ($17.4 billion) is already outstanding. The lender already has prepared for losses in outstanding paper by setting aside $1.2 billion to offset credit losses. The difference between Wells’ energy exposure and many of its competitors is that much of the California-based bank’s paper is non-investment grade. But the finance chief doesn’t sound like he’s sweating it. “This is not new for Wells Fargo,” Shrewsberry said at the event, and he noted “most of these loans are senior secured credit facilities.” However, European banks may have an even greater need to shore up capital. Many have billions in energy credit still waiting to be drawn down, which in turn could impact how much reserves must be set aside to bolster against defaults.

Credit Suisse CEO Tidjane Thiam spoke at the conference run by his bank Wednesday, and explained that while the company’s total energy exposure represents $9.1 billion, only $2.4 billion (about a quarter) of that had been drawn down by borrowers. In a JPMorgan report, analysts highlighted energy exposure for banks including Barclays, Standard Chartered, Royal Bank of Scotland and BNP Paribas. All told, the banks’ commodity exposure represented nearly $150 billion, much of which is yet to be drawn down, according to the report. Deutsche Bank didn’t quantify what its full energy exposure is in its fourth-quarter results, although, according to S&P Global Market Intelligence analyst Julien Jarmoszko, the lender has a lower exposure than its bigger competitors.

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Chesapeake looks done.

Energy Debt Fuels Broader Malaise (BBG)

This will most likely go down as the year of the Great Energy Debt Crisis, a spiral that exacerbated an economic funk that roiled the world. Companies are starting to go bankrupt. Banks are preparing for losses tied to oil and gas loans. And bond markets have all but closed to energy companies, especially the lowest-ranked ones. Borrowing costs for U.S. junk-rated energy companies have soared to records, with yields on their bonds surging past 20% for the first time, exceeding the past peak of about 17% in 2008, Bank of America Merrill Lynch index data show. Moody’s expects the U.S. default rate to reach the highest in six years in 2016, and a growing pool of investment-grade energy debt will most likely be downgraded to junk in the near future.

Chesapeake Energy is fast heading toward default, with Standard & Poor’s calling its debt “unsustainable.” Bonds of California Resources, Linn Energy, Energy XXI, Chesapeake and EP Energy have all lost more than 75% since the end of July. Without a doubt, the relentless carnage in energy debt is spilling over into the broader market, especially as prices continue to plunge, with Goldman Sachs seeing the possibility of crude prices dropping below $20 a barrel after rising as high as $107 in 2014.An estimated $75.7 billion in value has been eliminated from the pool of U.S. energy-related junk bonds since the end of June. Those losses are reverberating through mutual funds and hedge funds, which enabled an unprecedented borrowing spree by these companies just years earlier and are now suffering the consequences.

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Financial innovation.

Is The Market In European Coco Bonds About To Pop? (Ind.)

In May last year Martin Taylor, the former chief executive of Barclays Bank, addressed a crowd of high-powered financiers in the ballroom of the InterContinental Park Lane hotel in London. Mr Taylor, an adviser to the Bank of England’s Financial Policy Committee and an influential voice on market risk, spoke darkly about his fears for Coco bonds, a quirky-sounding debt instrument launched in the wake of the financial crisis. “I talk to a group like this about credit matters with the greatest timidity. I am sure you are good citizens and desire to exercise exemplary scrutiny. But I wonder whether you will flip – like the holders of European sovereign bonds before 2010 – from believing all issuers equally safe to thinking many equally precarious when the sky next darkens,” he said.

Skies have not only darkened this week, but Mr Taylor’s words have a prophetic rings: investors have indeed flipped out with concern about Cocos after the German lender Deutsche Bank was forced to reassure investors it could meet interest, or coupon, payments on its Coco bonds. The move has stoked fears that something is rotten at the heart of the European banking sector and led many to question why Cocos – considered a silver bullet solution – have melted like their chocolate breakfast cereal namesake in the face of market turmoil. Cocos, formally known as contingent convertible bonds, were born out of the 2008 financial crisis as a solution for stricken banks without the need for a state bail-out.

They work quite simply on the surface: banks issue them to finance their business like normal bonds but they morph into equity if a bank’s capital falls below a certain threshold. This automatically reduces a bank’s debt and boosts its capital buffers at a time when external investors could be reluctant to inject new money. The flexibility removes some of the risk inherent in loading up bank balance sheets with debt. But herein lies the rub: how can a bank be flexible on debt obligations without spooking the market into thinking it is in trouble?

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Long overdue.

Some Hedge Funds Want to Make Subprime Auto Loans Next Big Short (BBG)

A group of hedge funds, convinced they have found the next Big Short, are looking to bet against bonds backed by subprime auto loans. Good luck finding a bank willing to do the trade. Money managers have looked at betting that subprime auto securities will tank for many of the same reasons that investors wagered against risky mortgage bonds in the run-up to the financial crisis: Loan volume has mushroomed in the last few years, lending terms have become looser and delinquencies are ticking higher. Mary Kane, an asset-backed securities analyst at Citigroup Inc., wrote in a note late last month that the bank has received “an explosion of calls” in recent weeks, after the movie “The Big Short” portrayed a group of traders that wagered against subprime bonds.

The demand now is coming from hedge funds that trade everything from stocks to bonds, analysts said. But many banks, including Bank of America and Morgan Stanley, are not interested in making the bet happen for clients, according to representatives of the firms. Some said they fear that helping clients wager against car loans would be bad for their reputation, and that new capital rules and other post-crisis regulations would make the transactions difficult or even impossible to put together. “Most trading desks just don’t take that kind of risk now,” said Mike Edman, a former Morgan Stanley executive who helped invent credit derivatives that helped Wall Street banks bet against subprime mortgage bonds.

At least one trading desk has done this sort of trade. Etai Friedman, who runs hedge fund Crestwood Advisors, said he was able to work with a salesman he had known for years to buy an option that performed well if a custom-made index of subprime auto bonds fell. Friedman declined to identify the bank that did the trade, on which he earned a 36% return, but said finding a dealer was hard. “A trade like this is just taboo now,” Friedman said. Banks’ reluctance to help investors bet against subprime auto loans signals that may be paying more attention to how their trades will play with regulators and in the media, after having been criticized for crisis-era transactions.

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They’re all still thinking in terms of short term cycles only.

The Mining Industry Makes Oil Giants Look Great (BBG)

When you find yourself in a hole, the saying goes, stop digging. A simple lesson that arguably has bypassed a mining industry that’s wiped out more than $1.4 trillion of shareholder value by digging too many holes around the globe. The industry’s 73% plunge from a 2011 peak is far beyond the oil industry’s 49% loss during the same time. Just how long it will take for the world to erode bulging stockpiles of metals, coal and iron ore was the central debate at the mining industry’s biggest investment conference in Cape Town this week, which attracted more than 6,000 top executives, bankers, brokers, analysts, miners and reporters. This year may be the worst yet with prices trending lower for longer, according to Anglo American CEO Mark Cutifani, who says his company should be better prepared “for the winter that inevitably comes after the summer.”

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Because it sees it as its duty to harass its citizens.

Why Does the US Government Pursue Student Debtors in Prison? (BBG)

For Cecily McMillan, getting mail while incarcerated was a complex project. Any letter that was sent to her went through a metal detector and was opened by correctional officers before landing in the mailroom, where she had a two-hour window to collect it on a good day, she said. McMillan was living in the Rikers Island facility, a city-run jail complex in Queens, N.Y., but that did not stop the clock on her student loan payments. McMillan was serving a 58-day stint for assaulting a police officer, who tried to remove her from Zuccotti Park on the night of March 17, 2012, when people had assembled to mark the Occupy Wall Street protests. Eight months after she was released, McMillan realized she had missed a letter from a government debt collector warning that one of her federal student loans was coming due.

She ended up defaulting on her loan, leading that debt to balloon 35% to more than $7,600. In all, she had more than $100,000 in student debt. Her experience helps to illustrate the persistence of student loans—the only form of consumer debt that can almost never be erased, even if you declare bankruptcy. While collectors for other types of loans also pursue debtors behind bars, federal student loans are different because the government is the collector, which means taxpayer money is spent trying to reach borrowers who cannot easily communicate with the outside world and have few opportunities to earn money to repay the debt. McMillan, for example, said she was making less than a dollar per hour at her job as a suicide-prevention aid worker at Rikers. The average federal prison worker makes about 92 cents per hour, according to the Economic Policy Institute.

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“..whoever occupies the White House in 2017 will preside over a financial debacle like unto nothing in scale that the world has ever seen before..”

Notes from the Locked Ward (Jim Kunstler)

Beyond all the political histrionics, is there not some broad recognition that whoever occupies the White House in 2017 will preside over a financial debacle like unto nothing in scale that the world has ever seen before? With all the reverberating side effects imaginable among the traumatized nations? Something wicked has been creeping through the stock markets since the year began. The velocity and damage are amping up. Credit default swap spreads are yawning like fault lines in a ‘quake. Bankers are watching their share prices collapse. It’s a wonder that panic has not already broken out.

This is not just about Wall Street and its counterparts in London, Shanghai, Tokyo, and Frankfurt. This is the financial world (and underworld) catching up with the Economy of Actual Stuff. In the USA, that economy has bled out like a hapless bystander with a sucking chest wound for the last eight years. Despite all the patriotic sanctimony on view at the Superbowl, the nation appears to be visibly cracking up, along with the fantasy of a permanent global economy. None of the desperate work-arounds since 2008 have worked around the predicaments of our time. Politics will not abide a rational journey out of our fatal hyper-complexity to something simpler and more consistent with the realities at hand. Expect more and greater craziness as the year lurches on.

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I can tell you when: when the economy deteriorates sharply. How does 2016 sound?

When Will the Rest of Europe Want Its Own ‘Brexit’? (BBG)

If David Cameron leaves next week’s European Union summit with a deal to overhaul the terms of Britain’s membership, many of his counterparts will breathe a sigh of relief – and dig out their own wishlists. As populist and anti-EU forces surge across the region, the prime minister’s ultimately successful strategy of issuing demands for change and threatening to leave if they’re not met has left an impression on his fellow leaders, two senior EU officials said. Some see his approach as a template for pushing their own causes, the officials said, asking not to be named because the discussions were private. “The fact David Cameron raised a number of concerns and these concerns have all been addressed is creating a political precedent,” said Vincenzo Scarpetta, policy analyst at the London-based Open Europe think tank.

“The British renegotiation has to be seen as a longer-term path – Cameron has raised existential questions about the future of the EU.” Europe’s economic foundations were fractured by the debt crisis and now over a million refugees are pulling at its social fabric, bolstering populist movements from Madrid to Helsinki and fanning anti-EU feeling in former Soviet-bloc nations. That ensures when Cameron pushes for an accord at the Feb. 18-19 summit diminishing some of the bloc’s influence over the U.K., the shockwaves could resonate far beyond the English Channel. “All eyes are on France,” said John Springford, senior research fellow at London’s Centre for European Reform. EU officials are keen on “sending signals” to National Front leader Marine Le Pen and the wider French electorate “that this trick won’t work,” because “if France goes euro-skeptic, the project is toast.”

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“..it would lead to “downright apocalyptic scenarios”: Greece would collapse within a few weeks..”

Will Greece Become a Refugee Bottleneck? (Spiegel)

At five o’clock in the morning last Tuesday: Macedonia has once again closed its border, and just a few hours later, chaos reigns. Eighty buses with 4,000 refugees have been stopped by the Greek police 20 kilometers from the frontier and they are now waiting in a gas-station parking lot. Bus drivers argue, refugees jostle on the overfilled lot and overwhelmed police officers yell orders. “Macedonia, Macedonia,” the people waiting scream, “open the border!” But today, the border remains closed to most people. And if it were up to Brussels and the Germans, it would remain that way – that is, to anyone not from Syria, Iraq or Afghanistan. Since mid-November, Macedonia has tightened its border controls and whoever isn’t from one these three countries is turned away. Now, many people’s dreams of Europe come to an end here, in Idomene.

For it has recently become clear that Turkey is both unable and unwilling to stop the flow of refugees. As a result, the EU is placing its bets on Macedonia, with a plan that has the support of European Commission President Jean-Claude Juncker. Last year, the majority of the over 850,000 refugees traveling along the Balkan route went through Macedonia. If authorities have their way, that will come to an end. “Macedonia is our second line of defense,” says a high-ranking EU official. Several EU states have approved the deployment of 82 officers in Macedonia with the task of improving border protection. Financial support is to follow. If Macedonia reduces the number of people it allows into the country, it will lessen the pressure on Germany and Austria. It will also mean that more people will stay in Greece – and, Brussels hopes, place additional pressure on Greece to better protect its borders.

Idomene is a case study of what would happen were Europe to seal its borders and shut down the Balkan Route, the path most migrants take on their way to Germany and the rest of Europe. The result would be a massive backup of hundreds of thousands of refugees in Greece. And this in a country that is in a deep recession, and where every fourth citizen is unemployed. It is a country where angry farmers, teachers, doctors, lawyers, taxi drivers and ferry workers — actually everyone — is opposed to the government’s austerity measures. And it is a country that is once again in danger of sliding into its next big political crisis. The country will face big problems if Prime Minister Alexis Tsipras can’t find a compromise with the country’s international creditors, who are pushing for tough reforms. Or if Greece is made to bear the burden of the refugee crisis.

[..] According to a report by the Gemeinsames Analyse- und Strategiezentrum illegale Migration (Joint Analysis and Strategy Center on Illegal Immigration), many refugees in Greece live on the streets, even children and neo-nazis periodically hunt them down. The conditions for many refugees in Greece are described by the German authorities as “inhumane.” And still, the country is potentially being turned into a giant refugee camp. According to a confidential memo from the German Foreign Office, a backup of refugees would “inevitably lead to uncontrollable humanitarian conditions and security problems within days.” Migration researcher Franck Düvell from Oxford University warns that it would lead to “downright apocalyptic scenarios”: Greece would collapse within a few weeks, he believes.

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Feb 102016
 
 February 10, 2016  Posted by at 10:20 am Finance Tagged with: , , , , , , , , , ,  14 Responses »
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Arthur Rothstein Scene along Bathgate Avenue in the Bronx 1936

Europe’s Dead Cats Bounce, Deutsche Up 10% (BBG)
Surging Credit Risk for Banks a Major Issue in European Markets (WSJ)
Banks Eye More Cost Cuts Amid Global Growth Concerns (Reuters)
Europe Banks May Face $27 Billion Energy-Loan Losses (BBG)
European Banks: Oil, Commodity Exposure As High As 160% Of Tangible Book (ZH)
Europe’s ‘Doom-Loop’ Returns As Credit Markets Seize Up (AEP)
Options Bears Circle Nasdaq (BBG)
Deutsche Bank’s Big Unknowns (BBG)
The Market Isn’t Buying That Deutsche Bank Is ‘Rock Solid’ (Coppola)
Deutsche Considers Multibillion Bond Buyback (FT)
Distillates Demand Signals US Recession Is Imminent (BI)
US Oil Drillers Must Slash Another $24 Billion This Year (BBG)
Five Reasons Behind US Bank Stocks Selloff (FT)
10-Year Japanese Government Bond Yield Falls Below Zero (FT)
EU Probes Suspected Rigging Of $1.5 Trillion Debt Market (FT)
Italy, A Ponzi Scheme Of Gargantuan Proportions (Tenebrarum)
Maersk Profit Plunges as Oil, Container Units Both Suffer (BBG)
Australia Admits Recent Stellar Job Numbers Were Cooked (ZH)
Pentagon Fires First Shot In New Arms Race (Guardian)
NATO Weighs Mission to Monitor Mediterranean Refugee Flow (BBG)
Border Fences Will Not Stop Refugees, Migrants Heading To Europe (Reuters)

Brimming with confidence. Deutsche buying back its debt at this point in the game screams EXIT.

Europe’s Dead Cats Bounce, Deutsche Up 10% (BBG)

European stocks rebounded from their lowest level since October 2013 as investors assessed valuations following seven days of declines. A measure of lenders posted the best performance of the 19 industry groups on the Stoxx Europe 600 Index, with Deutsche Bank rising 10% as a person familiar with the matter said the German bank is considering buying back some of its debt. Commerzbank climbed 6%. Greece’s Eurobank Ergasias recovered 11% after falling to its lowest since at least 1999 on Tuesday, and Italy’s UniCredit SpA gained 10%. The Stoxx 600 advanced 1.6% to 314.39 at 9:27 a.m. in London, moving out of so-called “oversold” territory.

Global equities have been battered in 2016 in volatile trading amid investor concern over oil prices, earnings, the strength of the U.S. and Chinese economies, as well as the creditworthiness of European banks. The Stoxx 600 now trades at 13.9 times estimated earnings, about 20% below its April 2015 peak. A gauge tracking stock swings has jumped 47% this year. “When it feels this bad, it’s usually a good buying opportunity,” said Kevin Lilley at Old Mutual Global Investors in London. “But we’ve just been through a huge crisis of confidence and I think a long-term rebound is still very dependent on central-bank policy and global macro data. You’re fighting negative newsflow with very low valuations at the moment, and that’s the trade off.”

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Not just in Europe either.

Surging Credit Risk for Banks a Major Issue in European Markets (WSJ)

If there’s one thing on the mind of analysts and investors in Europe right now, it’s credit risk. The recent selloff in equities has sparked questions over whether a similar bearishness on credit is justified, particularly among European banks that have been slammed in stock markets over the last month. The iTraxx Senior Financials index tracks the cost of credit default swaps, which protect the investors buying them against a company’s default, for major financial institutions in Europe. More credit risk means pricier CDS, and the cost of European bank CDS has taken off. The index is still far from the extremely elevated levels reached in 2012, during the dismal days of the euro crisis.

Some of the latest analysts to weigh in on the subject come from Bank of America Merrill Lynch. In a research note out on Monday titled “the tide has turned,” analysts Ioannis Angelakis, Barnaby Martin and Souheir Asba argue that risk is becoming more systematic. The authors go on: “Risks are not contained any more within the EM/oil related names. Global growth outlook fears and risks of quantitative failure have led to weakness into cyclical names. Add also the recent sell-off in financials and you have the perfect recipe for a market sell-off that looks and feels systemic.” Within the last week we’ve spoken to analysts and investors that disagreed, suggesting that European bank credit was quite secure. Either way, it’s clear that the worries about credit risks have become heightened. How far the threat to balance sheets now goes is one of the biggest questions in European markets right now.

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The more you try to look confident, the less you do.

Banks Eye More Cost Cuts Amid Global Growth Concerns (Reuters)

Goldman Sachs and other U.S. banks are looking at ways to slash expenses further this year as market turmoil, declining oil prices and concerns about Germany’s Deutsche Bank have sent the sector’s shares down sharply. “We can absolutely do a lot more on the cost side if we have to, especially now, when you have to deliver a return,” Goldman Chief Executive Officer Lloyd Blankfein said on Tuesday at the Credit Suisse financial services forum in Miami. “We take a particular and energetic look at continued cost cuts when revenues are stalled,” he said. ” … Necessity is the mother of invention.” U.S. Bancorp CFO Kathy Rogers echoed Blankfein’s comments at a separate panel, saying her bank would continue cutting costs this year. She cited a smaller chance that interest rates would rise, which would have indicated a stronger economy and more revenue for the bank.

As executives were speaking at the conference, Deutsche Bank shares hit a record low, following their 9.5% plunge on Monday. Although the bank has said it has sufficient reserves, investors have worried that it will not be able to repay some bonds that are coming due. The bonds, called AT1 securities, convert into equity in times of market stress. Deutsche Bank’s woes reflect broader concerns about the health and profitability of euro zone banks. Last week, for instance, Sanford Bernstein analyst Chirantan Barua said Barclays should spin off its investment bank in an effort to revive its core UK retail and commercial business. Major Wall Street banks have also had a brutal start to 2016, with the KBW Nasdaq Bank index down nearly 20% on concerns about profitability.

Since demand for U.S. bank shares began to weaken in late November, the sector’s top five stocks have lost 20% of their market capitalization, or around $120 billion. Almost 70% of the banks deemed globally significant are trading below their tangible book values, or what they would be worth if liquidated. Analysts say if this continues, banks may have to restructure more drastically to cut costs. Investors said bank executives would need to look at other ways to boost profitability now that hopes for further interest rates hikes have faded. “They’re going to have to come up with other levers to pull, whether it is investing in technology or reducing headcount,” said John Fox at Feinmore Asset Management, which invests in financials. “There will be more pressure on expenses because of the interest rate environment.”

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Bloomberg lowballing.

Europe Banks May Face $27 Billion Energy-Loan Losses (BBG)

European banks face potential loan losses from energy firms of $27 billion, or about 6% of their pretax profit over three years, according to analysts at Bank of America. “We believe European banks with large exposures to energy and commodities lending will be increasingly challenged over these positions by shareholders,” analysts Alastair Ryan and Michael Helsby wrote in a note to clients on Tuesday. “While long-term oil- and metal-price forecasts are well above current levels, we expect the equity market to continue to stress exposures to current market prices and deduct potential losses from the earnings multiple of the banks.”

The $27 billion estimate is “potentially a smaller figure than is implied in the share prices of a number of banks,” and lenders’ potential losses aren’t a threat to the capitalization of the banking system or its ability to provide credit to the economy, they wrote. European banks are getting walloped by the global market rout and plunge in global oil prices while struggling to bolster their capital buffers amid record low interest rates in the euro zone. The 46-member Stoxx Europe 600 Banks Index has lost about 27% this year, outpacing the 15% drop by the wider Stoxx 600.

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Tyler Durden doesn’t lowball.

European Banks: Oil, Commodity Exposure As High As 160% Of Tangible Book (ZH)

[..] Morgan Stanley writes, “Europeans have not typically disclosed reserve levels against energy exposure, making comparison to US banks challenging. Moreover, quality of books can vary meaningfully. For example, we note that Wells Fargo has raised reserves against its US$17 billion substantially non-investment grade book, while BNP and Cred Ag have indicated a significant skew (75% and 90%, respectively) to IG within energy books. Equally we note that US mid-cap banks typically have a greater skew to higher-risk support services (~20-25%) compared to Europeans (~5-10%) and to E&P/upstream (~65% versus Europeans ~10-20%).” Morgan Stanley then proceeds to make some assumptions about how rising reserves would impact European bank income statements as reserve builds flow through the P&L: in some cases the hit to EPS would be .

A ~2% reserve build in 2016 would impact EPS by 6-27%, we estimate:We believe noticeable differences exist between US and EU banks’ portfolios in terms of seniority and type of exposure. As such, applying the assumption of a ~2% further build in energy reserves in 2016, versus ~4% assumed for large US banks, we estimate that EPS would decline by 6-27% for European-exposed names (ex-UBS), with Standard Chartered, Barclays, Credit Agricole, Natixis and DNB most exposed. [..] But the biggest apparent threat for European banks, at least according to MS calulcations, is the following: while in the US even a modest 2% reserve on loans equates to just 10% of Tangible Book value…

… in Europe a long overdue reserve build of 3-10% for the most exposed banks, would immediately soak up anywhere between 60 and a whopping 160% of tangible book!

Which means just one thing: as oil stays “lower for longer”, and as many more European banks are forced to first reserve and then charge off their existing oil and gas exposure, expect much more diluation. Which, incidentlaly also explains why European bank stocks have been plunging since the beginning of the year as existing equity investors dump ahead of inevitable capital raises. And while that answers some of the “gross exposure to oil and commodities” question, another outstanding question is what is the net exposure to China. As a reminder, this is what Deutsche Bank’s credit analyst Dominic Konstam said in his explicit defense of what needs to be done to stop the European bloodletting:

The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about — whole wd include the contagion to banking hubs in Sing/HKong

Ironically, it is Deutsche Bank that has been hit the hardest as the full exposure answer, either at the German bank or elsewhere, remains elusive; it is also what has cost European banks billions (and counting) in market cap in just the past 6 weeks.

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“..Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer..”

Europe’s ‘Doom-Loop’ Returns As Credit Markets Seize Up (AEP)

Credit stress in the European banking system has suddenly turned virulent and begun spreading to Italian, Spanish and Portuguese government debt, reviving fears of the sovereign “doom-loop” that ravaged the region four years ago. “People are scared. This is very close to a potentially self-fulfilling credit crisis,” said Antonio Guglielmi, head of European banking research at Italy’s Mediobanca. “We have a major dislocation in the credit markets. Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer,” he said. The perverse result is that investors are “shorting” the equity of bank stocks in order to hedge their positions, making matters worse. Marc Ostwald, a credit expert at ADM, said the ominous new development is that bank stress has suddenly begun to drive up yields in the former crisis states of southern Europe.

“The doom-loop is rearing its ugly head again,” he said, referring to the vicious cycle in 2011 and 2012 when eurozone banks and states engulfed in each other in a destructive vortex. It comes just as sovereign wealth funds from the commodity bloc and emerging markets are forced to liquidate foreign assets on a grand scale, either to defend their currencies or to cover spending crises at home. Mr Ostwald said the Bank of Japan’s failure to gain any traction by cutting interest rates below zero last month was the trigger for the latest crisis, undermining faith in the magic of global central banks. “That was unquestionably the straw that broke the camel’s back. It has created havoc,” he said. Yield spreads on Italian and Spanish 10-year bonds have jumped to almost 150 basis points over German Bunds, up from 90 last year.

Portuguese spreads have surged to 235 as the country’s Left-wing government clashes with Brussels on austerity policies. While these levels are low by crisis standards, they are rising even though the ECB is buying the debt of these countries in large volumes under quantitative easing. The yield spike is a foretaste of what could happen if and when the ECB ever steps back. Mr Guglielmi said a key cause of the latest credit seizure is the imposition of a tough new “bail-in” regime for eurozone bank bonds without the crucial elements of an EMU banking union needed make it viable. “The markets are taking their revenge. They have been over-regulated and now are demanding a sacrificial lamb from the politicians,” he said.

Mr Guglielmi said there is a gnawing fear among global investors that these draconian “bail-ins” may be crystallised as European banks grapple with €1 trillion of non-performing loans. Declared bad debts make up 6.4pc of total loans, compared with 3pc in the US and 2.8pc in the UK.

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Pop some more.

Options Bears Circle Nasdaq (BBG)

Options traders are betting the pain is far from over in the Nasdaq 100 Index. Unconvinced a two-day decline of 5% found the bottom, they’re loading up on protection in the technology-heavy index, pushing the cost of options on a Nasdaq 100 exchange-traded fund to the highest in almost two years versus the Standard & Poor’s 500 Index, data compiled by Bloomberg show. It’s the latest exodus from risk in the U.S. equity market, with selling that started in energy shares spreading to everything from health-care to banks. Technology companies, which until recently had been spared because of their low debt burden and rising earnings, joined the rout as investors focus on elevated valuations among the industry’s biggest stocks.

“Exuberance has turned to panic pretty quickly,” said Stephen Solaka at Belmont Capital. “Technology stocks have had quite a run, and now they’re seeing momentum the other way.” The S&P 500 slipped less than 0.1% to 1,852.21 at 4 p.m. in New York, extending its three-day decline to 3.3%. The Nasdaq 100 lost 0.3%. Options are signaling more trouble ahead just as professional speculators dump bullish wagers on the group. Hedge funds and large speculators have pared back their long positions on the Nasdaq 100 for a fourth week out of five, data from the Commodity Futures Trading Commission show. Investors were dealt a blow on Friday when disappointing results from LinkedIn and Tableau sent both companies down more than 40%.

The selloff has been heaviest in a handful of momentum stocks that boosted returns in the Nasdaq 100 last year, sending the gauge’s valuation to a one-year high versus the S&P 500’s in December. Since then, the Nasdaq multiple has tumbled faster than the S&P 500’s, dropping 20% versus 13%, as stocks from Amazon to Netflix faced scrutiny from investors amid broader economic concerns. Even after a 16% plunge from a record in November, Nasdaq 100 companies still trade at 16.3 times projected profits, higher than the S&P 500’s 15.4 ratio. Scott Minerd at Guggenheim Partners said in an interview that technology stocks will tumble even further this year as investors flee to safety and buyers stay on the sidelines.

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Tick. Tock.

Deutsche Bank’s Big Unknowns (BBG)

Regulation is forcing banks to retrench from some previously lucrative businesses. Lacklustre economic growth and low interest rates are stymieing profit growth in other areas. Concerns about China’s economy and the energy industry are rippling through markets, reducing activity among bank clients.There are specific concerns about Deutsche Bank. Cryan is trying to reshape the business while facing these ominous economic and market headwinds. There’s still a slew of litigation costs to be settled. And he’s trying to offload parts of the bank that don’t fit any more, including Postbank, the domestic German retail unit. The announced full-year net loss of €6.8 billion darkened the mood.

The bank’s shares now trade at about 35% of the tangible book value of the bank’s assets, partly because equity investors can’t get a clear handle on what lies ahead. In the credit market, concerns were fueled Monday by a note from CreditSights analyst Simon Adamson that spelled out “a base case” for Deutsche Bank to pay AT1 coupons this year and next year. But there is a caveat – a bigger than expected loss this financial year, because of a major fine or other litigation cost, could wipe out the bank’s capacity to pay. In other words, what happens if a big unknown strikes? Deutsche Bank, for its part, made the case that it has more than enough capacity for the 2016 payment due in April – 1 billion euros of capacity compared with coupons of about €350 million.

The bank says it estimates it has €4.3 billion of capacity for the April 2017 payment, partly driven by the proceeds from selling its stake in a Chinese lender. That sale is still pending regulatory approval but should go through in coming months. So, Deutsche Bank ought to have enough to make its payments and will be desperate to do so. Can pay, will pay. Unless, the bank is hit with a big shock, like a major, unforeseen litigation cost. Nervous investors await further communication.

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“I have said before that Deutsche Bank should be broken up. Now is the time to do it.”

The Market Isn’t Buying That Deutsche Bank Is ‘Rock Solid’ (Coppola)

This has been a terrible day for Deutsche Bank. The stock price has collapsed, and shares are now trading lower than they were in the dark days of 2008 after the fall of Lehman. Yields on CoCos and CDS are spiking too. Despite a reassuring statement from the German Finance Minister that he had “no concerns” about Deutsche Bank, markets are clearly worried that Deutsche Bank may be in serious trouble. And when “serious trouble” means that shareholders, subordinated debt holders and even senior unsecured bondholders could lose part or all of their investment, because of the bail-in rules under the EU’s Bank Recovery and Resolution Directive (BRRD), it is hardly surprising that investors are running for the hills. Even if Deutsche Bank were not in trouble before, it is now.

Unsurprisingly, the CEO, John Cryan, is upbeat about it. Today he issued a statement to staff advising them how to address the concerns of clients:

Volatility in the fourth quarter impacted the earnings of most major banks, especially those in Europe, and clients may ask you about how the market-wide volatility is impacting Deutsche Bank. You can tell them that Deutsche Bank remains absolutely rock-solid, given our strong capital and risk position. On Monday, we took advantage of this strength to reassure the market of our capacity and commitment to pay coupons to investors who hold our Additional Tier 1 capital. This type of instrument has been the subject of recent market concern. The market also expressed some concern about the adequacy of our legal provisions but I don’t share that concern. We will almost certainly have to add to our legal provisions this year but this is already accounted for in our financial plan.

I reviewed Deutsche Bank’s financial position as stated in their interim results last week. My findings do not support John Cryan’s statement that the bank is “rock solid”. Its capital and leverage ratios were not particularly strong by current standards, and have deteriorated since the full-year results. More worryingly, I found evidence that profits in two of the four divisions were only achieved by risking-up: the other two divisions were loss-making. Risking-up to generate profits would, if sustained over the medium-term, require substantially more capital than Deutsche Bank currently has. For two divisions of a bank that is currently delivering NEGATIVE return on equity to adopt strategies which would in due course require more capital does not appear remotely sensible.

Though I suppose actually admitting that the bank cannot generate anything like a reasonable return for shareholders without taking significantly more risk would be even worse. I also share the market’s concern about lack of legal provisions. A large part of the write-off of 5.2bn Euros due to litigation costs and fines in the interim results arose from cases already settled, particularly the record multi-jurisdictional fine for benchmark rate rigging in April 2015, though it also includes the 1.3bn Euros increase in provisions announced in October 2015 to cover charges potentially arising from the investigation of Deutsche Bank’s Russian operation for money laundering. But since these provisions seem light for what is a serious offense, and Deutsche Bank faces other potentially very expensive regulatory investigations and legal cases, I do not consider this write-off adequate.

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They’re so f**ked. Biggest bank, biggest derivatives portfolio. Run for the hills. When you even need your finance minister to do a reassurance call, you know you’re cooked.

Deutsche Considers Multibillion Bond Buyback (FT)

Deutsche Bank is considering buying back several billion euros of its debt, as Germany’s biggest bank steps up efforts to shore up the tumbling value of its securities against the backdrop of a broader rout of financial stocks. After European banks suffered a second consecutive day of sharp falls, Deutsche Bank is expected to focus its emergency buyback plan on senior bonds, of which it has about €50bn in issue, according to the bank. The move was unlikely to involve so-called contingent convertible bonds which, along with the bank’s shares, have been the butt of a brutal investor sell-off in recent days, people briefed on the plan said. The news came as Germany’s finance minister Wolfgang Schäuble and Deutsche CEO John Cryan both sought to assuage market fears.

Mr Schäuble said he had “no concerns” about the bank, while Mr Cryan insisted Deutsche’s position was “absolutely rock-solid”. The bank’s shares still fell 4%, taking the decline since the start of the year to 40%. Other European banks fared even worse on Tuesday, with Credit Suisse falling 8% and UniCredit 7%, as investor nervousness intensified over the relative weakness of European bank capital and earnings amid broader market turmoil. US banks, which have been hit hard in recent weeks, too, were only marginally weaker at lunchtime on Tuesday. Investors have also been rattled by the prospect of negative interest rates spreading across the developed world.

On Tuesday Japan became the first major economy with a sub-zero borrowing rate for 10-year debt as the total of government bonds trading with negative yields climbed to a new peak of $6tn. Concern about the solidity of bank debt — principally European bank cocos, which can suspend coupons and may convert into equity in a crisis — has prompted an investor dash to buy protection. A popular credit derivatives index that tracks the likelihood of default of investment-grade debt of European companies and banks was trading at 119 basis points on Tuesday, near its highest level since June 2013. Broader investor concerns about the health of the financial sector have coincided with more specific questions about Deutsche’s nascent restructuring programme.

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Ouch. Peddling fiction, sir?

Distillates Demand Signals US Recession Is Imminent (BI)

The US economy is flashing warning signs, particularly the industrial and manufacturing sectors. Demand for oil, and particularly so-called distillates – which are refined oil products such as jet fuels and heating oils – is crashing. Here’s the Barclays commodities team on the indicator:

January US demand for the four main refined products came in at -568k b/d (-3.9% y/y), compared with January 2015. Distillates were the weakest sector, down 18% y/y. Whether or not the data itself point to much weaker underlying growth in the US economy is still open to question, but not much. As illustrated in Figure 4, the scale of the decline in distillates demand in January has only ever been seen before during full-blown US recessions.

And here’s that chart:

Barclays does cite some mitigating factors, such as unusually warm winter weather and the fact this is based on preliminary data that may get revised upward later on. But it doesn’t look great.

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And counting.

US Oil Drillers Must Slash Another $24 Billion This Year (BBG)

North American oil and natural gas drillers will need to cut an additional 30% from their capital budgets to balance their spending with the cash coming in their doors even if crude rises to $40 a barrel, according to an analysis by IHS Inc. A group of 44 North American exploration and production companies are planning to spend $78 billion on capital projects this year, down from $101 billion last year. Those companies need to cut another $24 billion this year to get their spending in line with a historical 130% ratio of spending to cash flow, IHS said Monday.

“These spending cuts will be particularly troublesome for the highly leveraged companies,” said Paul O’Donnell at IHS Energy. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.” The analysis is based on IHS’s low-case price scenario of $40-a-barrel oil and $2.50-per-million-cubic-feet natural gas prices. IHS cited Concho Resources, Whiting Petroleum, WPX Energy, and PDC Energy. as examples of companies displaying the best spending discipline.

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“..“There is not any kind of imaginary line where you can say, ‘OK this has gone down enough,’ and it’s now a recovery play or a turnround play. They just go down more, until they are done going down..”

Five Reasons Behind US Bank Stocks Selloff (FT)

US bank stocks have suffered a brutal start to 2016. Out of the 90 stocks on the S&P financials index, just eight were in positive territory for the year at mid-morning on Tuesday. Two of the biggest losers, Bank of America and Morgan Stanley, are down 27% and 28% respectively. Citigroup, also down 27%, is now trading at just 6.5 times earnings, not far off its post-crisis trough of 5.9 times, reached during the depths of the European debt crisis five years ago.

• Collapsing expectations of US interest rate rises Analysts offer a lot of different reasons for the big sell-off, but on this they agree. “Lift-off” in December was supposed to usher in an era of higher interest rates — which are always good news for the banks. In previous rate-raising cycles, assets have always re-priced faster than liabilities, earning banks a bigger spread between the yields on their loans and the cost of their funds. But worsening data since then from big economies, notably China, has investors worried that the world economy is a lot sicker than they had assumed. Expectations of another three rate rises from the Fed this year have collapsed in a matter of weeks. Talk of a rate cut, or even a move to negative rates, is entering the picture.

• Worsening credit quality In itself, a lower oil price will not do much direct damage to the big banks’ balance sheets, say analysts. Total energy exposures amount to less than 3% of gross loans at the big banks, which have mostly investment-grade assets, and which have already pumped up reserves. Perhaps more worrying are the second-round effects: if weakness in oil-dependent communities begins to spill into commercial real estate loan books, say, or if consumers find they cannot afford repayments on loans for their new gas-guzzling cars. In an environment of precious little growth — the big six US banks produced exactly the same amount of revenue last year as they did in 2014 — rising credit costs are likely to lead to lower profits.

• Deutsche Bank Every sell-off needs a point of focus and in recent days it has been Deutsche Bank. The contortions of the Frankfurt-based lender weighed on the entire banking sector on Monday, as it fought to dispel fears that it could not pay a coupon on a bond. “I think maybe counterparty risk is emerging,” says Shannon Stemm at Edward Jones in St Louis. “At the root, are some of these [European] banks as well capitalised as the US banks? Probably not. Can they continue to build capital in an environment where there is not a lot of revenue growth, and a lot of expenses have already been taken out of the business?”

• Banks are banks These are confidence stocks. When markets are doing well, banks tend to do well, as companies feel better about doing deals and raising money, investors put on a lot of trades, and asset management arms benefit from big inflows. But when confidence disappears, banks tend to bear the brunt of the sell-off. Matt O’Connor at Deutsche Bank notes that in 15 corrections going back to 1983, the US banks sector has been hit roughly twice as hard as the rest of the market — regional banks about 1.8 times worse, and capital markets-focused banks about 2.3 times worse. “At the end of the day when markets get scared, banks go down more, that is just what happens,” he says. “There is not any kind of imaginary line where you can say, ‘OK this has gone down enough,’ and it’s now a recovery play or a turnround play. They just go down more, until they are done going down or markets feel better about macro conditions.”

• Bank stocks were not cheap before the slide At the peak last July, the S&P 500 was trading about 20% above historical levels, and bank stocks were up to 25% higher than their historical averages, based on multiples of estimated earnings.* But none of these reasons is providing much comfort to investors at the moment. At Edward Jones, Ms Stemm is recommending clients ride out the turmoil by switching big global universal banks for steadier, US-focused lenders such as Wells Fargo and US Bancorp. “If there are global macro concerns, if recession concerns really are on the table, investors would rather get out than wait to see what happens,” she says.

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Japan is getting cooked. Fried. Roasted. Torched.

10-Year Japanese Government Bond Yield Falls Below Zero (FT)

The universe of government bonds trading with negative yields climbed to a new peak of $6tn on Tuesday as Japan became the first major economy with a sub-zero borrowing rate for 10-year debt. Benchmark bonds issued by the world’s third-largest economy dropped to a yield of minus 0.05%, as investors sought shelter from market convulsions triggered by sliding oil prices, concern for the health of the global economy and mounting fears over parts of the financial system. Japan’s recent decision to introduce a charge on new reserves parked with the central bank has rippled out across global government bond markets as investors expect central banks in Europe to push their overnight borrowing rates further into negative territory. That has spurred strong buying of positive yielding government debt across the eurozone, US and UK markets, while also bolstering other havens such as gold and the yen.

“The bear market in risk assets is evolving very quickly,” said Andrew Milligan at Standard Life. “A month ago the focus was China, then oil, then the prospect of US recession, now it is European financial companies.” The move comes just 11 days after the Bank of Japan’s surprise decision to follow in the footsteps of Switzerland, Denmark, Sweden and the eurozone by adopting negative interest rates, raising fresh concern about the side-effects of ultra-loose monetary policy by central banks. The growing trend of negative yields within the $23tn universe of developed world government debt tracked by JP Morgan has also sapped sentiment for financial shares and bonds, intensifying the demand for havens, as investors reassess their holdings of equities and corporate bonds. David Tan at JPMorgan said negative interest rates were being viewed as negative for bank earnings.

“The principal driver of negative JGB yields was the Bank of Japan’s deposit rate cut to -10bp, and the market now expects additional cuts during this year starting from as soon as the next Bank of Japan meeting,” he said. “This has contributed to a sell-off in banking stocks and a renewed flight to safety into government bonds.” Leading the slide among financials has been Deutsche Bank, with investors worried that it may have trouble repaying its debts. David Ader, CRT Investment Banking bond strategist, said market skittishness was understandable, if not expected. “The European banking system clearly remains a meaningful concern and memories of the credit crisis in the sector are still fresh,” he said.

For Japan’s government, the appreciating yen looms as an uncomfortable development. A weak currency is one of the major hallmarks of Prime Minister Shinzo Abe’s economic revival plan, dubbed Abenomics. Investors now suspect Japan Inc’s assumptions of an average rate of Y117.5 against the dollar during 2016 could leave companies missing profit forecasts and force the BoJ and government into fresh action — if more is possible. “If a 20 basis points cut won’t stop the yen rising, what can the Japanese authorities do? That is the question the market is asking,” said Shusuke Yamada at Bank of America. Investors, especially foreign funds that poured into the Japanese stock market during 2013, are increasingly taking the view that the magic of the “Abenomics” growth programme has worn off. Foreigners sold a net Y1.66tn of Japanese equities in January, according to official figures.

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Why not have another one of these scams?

EU Probes Suspected Rigging Of $1.5 Trillion Debt Market (FT)

European regulators have opened a preliminary cartel investigation into possible manipulation of the $1.5tn government-sponsored bond market, in the latest efforts to root out rigging involving financial traders. The European Commission’s early-stage inquiry comes amid revelations that the US Department of Justice and the UK’s Financial Conduct Authority are also investigating the market. The investigations are part of a campaign by antitrust regulators to root out collusion in financial markets following revelations that groups of traders worked together to manipulate Libor, a key rate that underpins the price of loans around the world. Further allegations followed that traders colluded to rig foreign exchange markets.

The commission’s powerful competition department has sent questionnaires to a number of market participants as part of an early-stage probe into possible manipulation of the price of supranational, subsovereign and agency debt, known as the SSA market. This market covers a diverse range of debt issuers including organisations such as the European Bank for Reconstruction and Development and regional borrowers like Germany’s Länder. A common feature is that the bonds often have a form of implicit or explicit state guarantee. Banks and interdealer brokers have so far been fined around $20bn by authorities around the world in response to the Libor and foreign exchange rate scandals which saw over a dozen leading financial institutions investigated by antitrust authorities.

The findings also led to criminal prosecutions of individual traders, and spurred investigations into other markets such as derivatives trading. The Financial Times reported last month that Crédit Agricole, Nomura and Credit Suisse are among a number of banks being investigated by the DOJ as part of its investigation into possible manipulation of SSA markets. London-based traders at these three banks, in addition to another trader at Bank of America, have been put on leave in response to the DOJ investigations, according to people familiar with the matter. It is understood that the commission’s inquiry started around the same time as the DoJ probe.

The commission’s enquiries concern a possible cartel or “concerted practice” according to the person familiar with the investigation, who did not provide further details. The questionnaires will help Margrethe Vestager, the commission’s competition chief, decide whether there are the grounds to launch a formal probe. Complex cartel cases typically take a minimum of four years to complete and are usually based on evidence from tip-offs provided by whistleblowers. The commission can fine a company involved in a cartel up to 10% of its global turnover.

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I picked one detail from the longer article on eurozone banks.

Italy, A Ponzi Scheme Of Gargantuan Proportions (Tenebrarum)

Ever since the ECB has begun to implement its assorted money printing programs in recent years – lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds – bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their outstanding deposit liabilities, the more of the outstanding deposit money is in fact represented by “covered” money substitutes as opposed to fiduciary media.


Euro area true money supply (excl. deposits held by non-residents) – the action since 2007-2008 largely reflects the ECB’s money printing efforts, as private banks have barely expanded credit on a euro area-wide basis since then.

Many funny tricks have been employed to keep euro area banks and governments afloat during the sovereign debt crisis. Essentially these consisted of a version of Worldcom propping up Enron, with the central bank’s printing press as a go-between. As an example here is how Italian banks and the Italian government are helping each other in pretending that they are more solvent than they really are: the banks buy government properties (everything from office buildings to military barracks) from the government, and pay for them with government bonds. The government then leases the buildings back from the banks, and the banks turn the properties into asset backed securities. The Italian government then slaps a “guarantee” on these securities, which makes them eligible for repo with the ECB. The banks then repo these ABS with the ECB and take the proceeds to buy more Italian government bonds – and back to step one.

Simply put, this is a Ponzi scheme of gargantuan proportions. Still, in view of these concerted efforts to reliquefy the banking system, one would expect that European banks should be at least temporarily solvent, more or less. Since they have barely expanded credit to the private sector, preferring instead to invest in government bonds, the markets should in theory have little to worry about.

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Overinvested.

Maersk Profit Plunges as Oil, Container Units Both Suffer (BBG)

A.P. Moeller-Maersk A/S reported an 84% plunge in 2015 profit after its oil unit was hit by lower energy prices and its container division got squeezed between sluggish trade growth and overcapacity. Maersk said net income was $791 million last year compared with $5.02 billion in 2014. The result includes a writedown in the value of Maersk’s oil assets by $2.6 billion, the Copenhagen-based company said. “Given our expectation that the oil price will remain at a low level for a longer period, we have impaired the value of a number of Maersk Oil’s assets,” CEO Nils Smedegaard Andersen said in the statement. “We will continue to strengthen the Group’s position through strong operational performance and growth investments.”

In October, Maersk started cost cut programs for both of its two biggest units to address what analysts have described as a perfect storm for the conglomerate, which historically has found support from positive market conditions for at least one the two divisions. Maersk said Wednesday that 2016’s underlying profit will be “significantly below” last year’s $3.1 billion. The Maersk Line unit’s profit will also be “significantly below” 2015’s level, which was $1.3 billion. Maersk Oil will report a loss this year, it said. The unit currently breaks even when oil prices are in a range of $45 to $55 a barrel, the company said.

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“..with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth…”

Australia Admits Recent Stellar Job Numbers Were Cooked (ZH)

Two months ago the Australian media, which unlike its US counterpart refuses to be spoon fed ebullient economic propaganda, called bullshit on the spectacular October job numbers, when instead of adding 15,000 jobs as consensus expected, Australia’s Bureau of Statistics reported that a whopping 58,600 jobs had been added. [.] One month later, the situation got even more ridiculous, when instead of the expected 10,000 drop in November, the “statistical” bureau announced that 71,400 jobs had been added, the most in 15 years, and the equivalent of 1 million jobs added in the US. Once again the local media cried foul.

Two months later we find that the media, and all those mocking the government propaganda apparatus, were spot on, because moments ago today, Australia Treasury Secretary John Fraser, during testimony to parliamentary committee, admitted that jobs growth for the two months in question “may be overstated.” What’s the reason? The same one the propaganda bureau always uses when its lies are exposed: “technical issues”, the same explanation the Atlanta Fed used in its explanation for a strangely belated release of its GDP Now estimate one month ago. Here’s Bloomberg with more:

Australia has had some technical issues with its labor data, which “look a little bit better” than would otherwise have been the case, the secretary to the Treasury said, commenting on record employment growth in the final quarter of 2015. John Fraser, the nation’s top economic bureaucrat, told a parliamentary panel in Canberra Wednesday that he held discussions on the employment figures with the chief statistician this week. He didn’t elaborate on the meeting but said the recent strength in the jobs market is encouraging.

There were some “technical issues” in October and November that may have made the employment figures “look a little bit better than otherwise would be the case,” he said. The technical issues relate to “rolling off” of participants in the labor survey. Australia’s economy added 55,000 jobs in October and a further 74,900 in November, before shedding 1,000 in December to produce the record quarterly gain. Questions regarding the accuracy of the data have been raised following acknowledgment by the statistics agency in 2014 of measurement challenges.

Why the sudden admission it was all a lie? Simple: weakness in commodity prices “is far greater than people had been expecting,” Fraser said in earlier remarks to the panel. Australia is now “swimming against the tide” because of uncertainties in the global economy, he added. Translation: “we need more easing, and to do that, the economy has to go from strong to crap.” And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.

Which makes us wonder: with the Yellen Fed in desperate need of political cover for relenting on its terrible rate hike strategy, and once again lowering rates to zero or negative, a recession – something JPM hinted at yesterday – will be critical. And what better way to admit the US has been in one for nearly a year than to drastically revise all the exorbitant labor numbers over the past 12 months. You know, for “technical reasons”…

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The crazies are in charge: “Ash Carter said he would ask for spending on US military forces in Europe to be quadrupled in the light of “Russian aggression”. The allocation for combating Islamic State, in contrast, is to be increased by 50%.”

Pentagon Fires First Shot In New Arms Race (Guardian)

As the voters of New Hampshire braved the snow to play their part in the great pageant of American democracy on Tuesday, the US secretary of defence was setting out his spending requirements for 2017. And while the television cameras may have preferred the miniature dramas at the likes of Dixville Notch, the reorientation of US defence priorities under the outgoing president may turn out to exert the greater influence – and not in a good way, at least for the future of Europe. In a speech in Washington last week, previewing his announcement, Ash Carter said he would ask for spending on US military forces in Europe to be quadrupled in the light of “Russian aggression”. The allocation for combating Islamic State, in contrast, is to be increased by 50%. The message is unambiguous: as viewed from the Pentagon, the threat from Russia has become more alarming, suddenly, even than the menace that is Isis.

If this is Pentagon thinking, then it reverses a trend that has remained remarkably consistent throughout Barack Obama’s presidency. Even before he was elected there was trepidation in some European quarters that he would be the first genuinely post-cold war president – too young to remember the second world war, and more global than Atlanticist in outlook. And so it proved. From his first day in the White House, Obama seemed more interested in almost anywhere than Europe. He began his presidency with an appeal in Cairo addressed to the Muslim world, in an initiative that was frustrated by the Arab spring and its aftermath, but partly rescued by last year’s nuclear agreement with Iran. He had no choice but to address the growing competition from China, and he ended half a century of estrangement from Cuba.

But Europe, he left largely to its own devices. When France and the UK intervened in Libya, the US “led from behind”. Most of the US troops remaining in Europe, it was disclosed last year, were to be withdrawn. Nor was such an approach illogical. Europe was at peace – comparatively, at least. The European Union was chugging along, diverted only briefly (so it might have seemed from the US) by the internal crises of Greece and the euro. Even the unrest in Ukraine, at least in its early stages, was treated by Washington more as a local difficulty than a cold war-style standoff. Day to day policy was handled (fiercely, but to no great effect) by Victoria Nuland at the state department; Sanctions against Russia were agreed and coordinated with the EU. All the while – despite the urging of the Kiev government – Obama kept the conflict at arm’s length.

Congress agitated for weapons to be sent, but Obama wisely resisted. This was not, he thereby implied, America’s fight. In the last months of his presidency, this detachment is ending. The additional funds for Europe’s defence are earmarked for new bases and weapons stores in Poland and the Baltic states. There will be more training for local Nato troops, more state-of-the-art hardware and more manoeuvres. Now it is just possible that the extra spending and the capability it will buy are no more than sops to the “frontline” EU countries in the runup to the Nato summit in Warsaw in July, to be quietly forgotten afterwards. More probably, though, they are for real – and if so the timing could hardly be worse. Ditto the implications for Europe’s future.

By planning to increase spending in this way, the US is sending hostile signals to Russia at the very time when there is less reason to do so than for a long time. It is nearly two years since Russia annexed Crimea and 18 months since the downing of MH17. The fighting in eastern Ukraine has died down; there is no evidence of recent Russian material support for the anti-Kiev rebels, and there is a prospect, at least, that the Minsk-2 agreement could be honoured, with Ukraine (minus Crimea) remaining – albeit uneasily – whole.

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These people are inventing a entire parallel universe, and nobody says a thing. NATO to patrol the Med on refugee streams? NATO is an aggression force, an army way past its expiration date. It has zero links to refugees. There is no military threat there. Oh, but then we bring in Russia.. “Stoltenberg said naval patrols would fit into “reassurance measures” to shield Turkey from the war in neighboring Syria..” ‘We’ have lost our marbles. ‘We’ are on the war path.

NATO Weighs Mission to Monitor Mediterranean Refugee Flow (BBG)

NATO will weigh calls for a naval mission in the eastern Mediterranean Sea to police refugee streams as a fresh exodus from Syria adds to European leaders’ desperation. Such a mission, proposed by Germany and Turkey, would thrust the 28-nation alliance into the humanitarian trauma aggravated by the Russian-backed offensive by Syrian troops that drove thousands out of Aleppo and toward Turkey. “We will take very seriously a request from Turkey and other allies to look into what NATO can do to help them cope with and deal with the crisis,” NATO Secretary General Jens Stoltenberg told reporters in Brussels on Tuesday. NATO is confronted with Russian intervention in the Middle East – including airspace violations over Turkey, an alliance member – after reinforcing its eastern European defenses in response to the Kremlin’s annexation of Crimea and fomenting rebellion in Ukraine in 2014.

Allied warships now on a counter-terrorism mission in the Mediterranean and anti-piracy patrols off the coast of Somalia could be reassigned to monitor and potentially go after human traffickers in the Aegean Sea between Greece and Turkey. A naval mission, to be discussed Wednesday and Thursday at a meeting of defense ministers in Brussels, is controversial. It could produce unpleasant images of NATO sailors and soldiers herding refugee children behind barbed wire, handing a propaganda victory to Islamic radicals and the alliance’s detractors in the Kremlin. With her political standing in jeopardy as German public opinion turns against her open-arms approach, German Chancellor Angela Merkel went to Ankara on Monday with limited European leverage to persuade Turkey to house more refugees on its soil instead of pointing them toward western Europe.

Stoltenberg said naval patrols would fit into “reassurance measures” to shield Turkey from the war in neighboring Syria that already include Patriot air-defense missiles and air surveillance over Turkish territory and the coast. U.S. Ambassador to NATO Douglas Lute called on European Union governments to take the lead on civilian emergency management, with the alliance confined to offering backup. He said military planners will draw up options. “This is fundamentally an issue that should be addressed a couple miles from here at EU headquarters, but it doesn’t mean NATO can’t assist,” Lute told reporters.

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I could have spared them the research.

Border Fences Will Not Stop Refugees, Migrants Heading To Europe (Reuters)

Efforts by European countries to deter migrants with border fences, teargas and asset seizures will not stem the flow of people into the continent, and European leaders should make their journeys safer, a think-tank said on Wednesday. The Overseas Development Insitute (ODI) said Europe must act now to reduce migrant deaths in the Mediterranean, where nearly 4,000 people died last year trying to reach Greece and Italy, and more than 400 have died so far this year. European governments could open consular outposts in countries like Turkey and Libya which could grant humanitarian visas to people with a plausible asylum claim, the think-tank said. Allowing people to fly directly to Europe would be safer and cheaper than for them to pay people smugglers, and would help cripple the smuggling networks that feed off the migrant crisis, the London-based ODI said.

More than 1.1 million people fleeing poverty, war and repression in the Middle East, Asia and Africa reached Europe’s shores last year, prompting many European leaders to take steps to put people off traveling. But the ODI said new research showed such attempts either fail to alter people’s thinking or merely divert flows to neighboring states. Researchers interviewed 52 migrants from Syria, Eritrea and Senegal who had recently arrived in Germany, Britain and Spain. Their journeys had cost an average 2,680 pounds ($3,880) each. More than one third had been victims of extortion, and almost half the Eritreans had been kidnapped for ransom during their journey. Researchers said that, contrary to popular perception, many migrants left home without a clear destination in mind. Their experiences along the way and the people they met informed where they would go next.

Information from European governments was unlikely drastically to alter migrants’ behavior, the ODI said. “Our research suggests that while individual EU member states may be able to shift the flow of migration on to their neighbors through deterrent measures such as putting up fences, using teargas and seizing assets, it does little to change the overall number … coming to Europe,” said report co-author Jessica Hagen-Zanker. “As one of the people we interviewed put it ‘When one door shuts, another opens’.”

Read more …

Aug 062015
 
 August 6, 2015  Posted by at 8:05 am Finance Tagged with: , , , , , , , ,  23 Responses »
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Arnold Genthe “Chinatown, San Francisco. The street of the gamblers at night” 1900

Far too many people have already used lines like “We Are All Greeks Now” for the words to hold on to much if any meaning by now. But it’s still a very accurate description of what awaits us all. Just not for the same reasons most who used it, did.

No, I don’t really want to talk about Greece again. I want to talk about where you live. And about how similar the two will be not too long from now. How Greece is holding up a lesson and a big red flashing warning sign for all of us.

Greece is the mold upon which all of our futures will be based. Quite literally. Greece is a test tube baby rat.

Greece will never “recover” to our North American and Western European economic levels (if ever they were there). Instead, it’s us who will descend, “uncover” so to speak, to the levels Greece is at today. That is baked into the cake, that is inevitable, and that is therefore what we need to be ready for.

If we wake up in time to this new reality, we may, and that’s still only may, be able to prevent the worst, prevent something akin to the same punitive measures the Troika has unleashed upon Greek society, fully wrecking it in the process, its healthcare system, the safety nets for its most needy.

We may find a way to make a smoother transition from here to there if we prepare in time. But that’s the best we can do. As societies, that is; individual fates will vary.

Greece will find ways to do better than it does right now, balance things out, but it won’t be through a recovery or a bailout. Athens will -because it must, lest the humanitarian crisis deepens profoundly- find ways to better -fairer- apportion what means are at its disposition, amongst its people.

We all have to do the same, wherever we are. Our advantage today is that we can do this from a relatively well-to-do starting point. Our disadvantage is that, unlike the Greeks, we do not understand the reality we’re in.

We’re ignorant, we deny, we prefer not to think about it. The Greeks used to be like that, but they no longer have that choice. And we won’t for much longer either.

The reason why Greece is where it is today, and why we will all be there tomorrow, we can by now for good reason call ‘deceptively simple’. That is to say, the global banking system that orchestrated the financial crisis refuses to take the losses on its extravagant bets, and it has the political clout to get its way, all the way. That’s all you need to know.

The losses are therefore unloaded upon the citizens of our respective nations. But the losses are far too massive for those citizens to bear. They, or rather we, will see our societies stripped of most things, most of the social fabric, that hold them together. Any service that costs money will be cut, progressively, until there’s very little left.

It happened in Greece, and it will happen all over the world. Mind you, this is nothing new; third world nations have undergone the same treatment for decades, if not forever. Disaster capitalism wasn’t born yesterday. What’s new is that it now takes place in the supposedly well-off part of the world, in this case the European Union. And it will spread.

The successive Greek bailouts that have now ruined the entire nation were “needed” to stem the losses on wagers, derivatives and other, incurred by global banks, French, Dutch, German, Wall Street, the City. The first bailout in 2010 also served the purpose of allowing the banks time to shift away from their exposure to Greek debt.

All bailouts, be they directly for banks, or indirectly through a country like Greece and then for the banks, have been set up according to the exact same MO. Greece’s economic reserves just happened to be a bit tighter, and moreover, the country was a convenient lab rat and scarecrow to prevent others from protesting the bailout system too loudly.

The whole system of bailouts, be it in Greece or in the US, was never anything else than a transfer of public money to private interests, with the express aim of making good on the lost wagers of that private sector. With impunity, no less.

And no, the losses have not disappeared. Nor have they been written down. They have instead been transferred to fester in dark vaults, hidden behind swaps and other derivatives, and on central bank balance sheets. But that won’t last either.

The Automatic Earth has warned of the imminent deleveraging and deflation for years, and now everyone is talking about deflation. No worries, guys. As you were. But do please try and understand how this works.

There’s all these losses, with no-one prepared to write down any of them (see Germany vs Greece), and the elites behind the banks unwilling to absorb any -the elites instead insist on getting richer even in a depression-. There is only one outcome left then: that you and me will have to become much poorer. They are our losses now.

The only way the rich can keep getting richer is if the rest of us keep getting poorer. Economic growth is a thing of the past. Deleveraging has started for real. Huge amounts of zombified ‘money’ are disappearing as we speak.

That leaves the world with a lot less wealth. And still the rich seek to get richer, and they are in charge. The math is simple. As Greece shows us, the rich have no qualms about throwing an entire society off the cliff.

A large part of what is now considered wealth is made up of QE and related and inflated stocks, bonds and real estate prices, all of which is zombie wealth. Which can disappear overnight. And if it can, it will.

China stocks and “real” estate and local government debt to shadow banks, emerging markets, commodity currencies (Australia, New Zealand, Canada etc.), if you overlook that whole panorama it’s hard to see how you could possibly think there’ll be some kind of recovery.

Where should it come from? Overall debts are much worse, much higher, now, then they were in 2008. We haven’t had a recovery, we’ve had an “uncovery”. And we’re headed for a discovery.

The entire idea, the phantom ghost, of a functioning market died, if you were willing to look, with the advent of central bank intervention. People who work in finance, obviously and for understandable reasons, have never been willing to take that look. They’re just looking to make more money even if things tumble down the mountain in a handbasket. They call it “opportunity”.

But they haven’t been actual investors in years. They’ve just helped the banking system put you into deeper doodoo. Greece shows us where that leads. And soon, wherever you live will show that to you too.

Deflation is a bitch. Nicole Foss here at the Automatic Earth has used the phrase “multiple claims to underlying real wealth”, for a long time. It’s like playing musical chairs. And you’re not winning. You never had a chance.

The only people who will wind up winning are the rich trying to get richer. The rest of us will soon live like the Greeks, and that’s if we are lucky.

There is no other possibility. “Money” is vanishing fast, and the only way it can even seem to return is if central banks do more QE, but that’s a dead in the water policy. Economic growth across the globe, and certainly in the west, is an illusion.

China was the last place that briefly seemed to have any, and they screwed up just like us, ending up with far too much debt to ever repay.

There is a point when the can gets so big and heavy, no-one can kick it down any road anymore. Not even one that plunges down a mountain. Something to do with gravity.

Jan 122015
 
 January 12, 2015  Posted by at 10:14 pm Finance Tagged with: , , , , , ,  11 Responses »
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DPC Chicago & Alton Railroad, Joliet, Illinois 1901

Boy, did the ‘experts’ and ‘analysts’ drop the ball on this one, or what’s the story. Only today, Goldman’s highly paid analysts admitted they’ve been dead wrong from months, that their prediction that OPEC would cut production will not happen, and that therefore oil may go as low as $40. Anyone have any idea what that miss has cost Goldman’s clients? And now of course other ‘experts’ – prone to herd behavior – ‘adjust’ their expectations as well.

They all have consistently underestimated three things: the drop in global oil demand, the impact QE had on commodity prices, and the ‘power’ OPEC has. Everyone kept on talking, over the past 3 months, as oil went from $75 – couldn’t go lower than that, could it? – to today’s $46, about how OPEC and the Saudis were going to have to cut output or else, but they never understood the position OPEC countries are in. Which is that they don’t have anything near the power they had in 1973 or 1986, but that completely escaped all analysts and experts and media. Everyone still thinks China is growing at a 7%+ clip, but the only numbers that sort of thing is based on come from .. China. As for QE, need I say anymore, or anything at all?

So Goldman today says oil will drop to $40, but Goldman was spectacularly wrong until now, so why believe them this time around? As oil prices plunged from $75 in mid november all the way to $45 today (about a 40% drop, more like 55% from June 2014’s $102), their analysts kept saying OPEC and the Saudis would cut output. Didn’t happen. As I said several times since last fall, OPEC saw the new reality before anyone else. But why did it still take 2 months+ for the ‘experts’ and ‘analysts’ to catch up? I would almost wonder how many of these smart guys bet against their clients in the meantime.

I’m going to try and adhere to a chronological order here, or both you and I will get lost. On November 22 2014, when WTI oil was at about $75, I wrote:

Who’s Ready For $30 Oil?

What is clear is that even at $75, angst is setting in, if not yet panic. If China demand falls substantially in 2015, and prices move south of $70, $60 etc., that panic will be there. In US shale, in Venezuela, in Russia, and all across producing nations. Even if OPEC on November 27 decides on an output cut, there’s no guarantee members will stick to it. Let alone non-members. And sure, yes, eventually production will sink so much that prices stop falling. But with all major economies in the doldrums, it may not hit a bottom until $40 or even lower.

Oil was last- and briefly – at $40 exactly 6 years ago, but today is a very different situation. All the stimulus, all $50 trillion or so globally, has been thrown into the fire, and look at where we are. There’s nothing left, and there won’t be another $50 trillion. Sure, stock markets set records. But who cares with oil at $40? Calling for more QE, from Japan and/or Europe or even grandma Yellen, is either entirely useless or will work only to prop up stock markets for a very short time. Diminishing returns. The one word that comes to mind here is bloodbath. Well, unless China miraculously recovers. But who believes in that?

5 days later, on November 27, with WTI still around $75, I followed up with:

The Price Of Oil Exposes The True State Of The Economy

Tracy Alloway at FT mentions major banks and their energy-related losses:

“Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. [..] if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.”

That’s just one loan. At 60 cents on the dollar, a $340 million loss. Who knows how many similar, and bigger, loans are out there? Put together, these stories slowly seeping out of the juncture of energy and finance gives the good and willing listener an inkling of an idea of the losses being incurred throughout the global economy, and by the large financiers. There’s a bloodbath brewing in the shadows. Countries can see their revenues cut by a third and move on, perhaps with new leaders, but many companies can’t lose that much income and keep on going, certainly not when they’re heavily leveraged.

The Saudi’s refuse to cut output and say: let America cut. But American oil producers can’t cut even if they would want to, it would blow their debt laden enterprises out of the water, and out of existence. Besides, that energy independence thing plays a big role of course. But with prices continuing to fall, much of that industry will go belly up because credit gets withdrawn.

That was then. Today, oil is at $46, not $75. Also today, Michael A. Gayed, CFA, hedge funder and chief investment strategist and co-portfolio manager at Pension Partners, LLC, draws the exact same conclusion, over 7 weeks and a 40%-odd drop in prices later:

Falling Oil Reveals The Truth About The Market

It seems like every day some pundit is on air arguing that falling oil is a net long-term positive for the U.S. economy. The cheaper energy gets, the more consumers have to spend elsewhere, serving as a tax cut for the average American. There is a lot of logic to that, assuming that oil’s price movement is not indicative of a major breakdown in economic and growth expectations. What’s not to love about cheap oil? The problem with this argument, of course, is that it assumes follow through to end users. If oil gets cheaper but is not fully reflected in the price of goods, the consumer does not benefit, or at least only partially does and less so than one might otherwise think. I believe this is a nuance not fully understood by those making the bull argument. Falling oil may actually be a precursor to higher volatility as investors begin to question speed’s message.

How much did Michael’s clients lose in those 7+ weeks?

Something I also said in that same November 27 article was:

US shale is no longer about what’s feasible to drill today, it’s about what can still be financed tomorrow.

And whaddaya know, Bloomberg runs this headline 51 days and -40% further along:

What Matters Is the Debt Shale Drillers Have, Not the Oil

U.S. shale drillers may tout how much oil they have in the ground or how cheaply they can get it out. For stock investors, what matters most is debt. The worst performers among U.S. oil producers in a Bloomberg index owe about 5.7 times more than they earn, before certain deductions, compared with 1.7 times for companies that have taken less of a hit. Operations, such as where the companies drill or how much oil versus gas they pump, matter less.

“With oil prices below $50 and approaching $40, we’re in survivor mode,” Steven Rees, who helps oversee about $1 trillion as global head of equity strategy at JPMorgan Private Bank, said via phone. “The companies with the higher degrees of leverage have underperformed, and you don’t want to own those because there’s a fair amount of uncertainty as to whether they can repay that debt.”

That’s the exact same thing I said way back when! Who trusts these guys with either their money or their news? When they could just read me and be 7 weeks+ ahead of the game? Not that I want to manage your money, don’t get me wrong, I’m just thinking these errors can add up to serious losses. And they wouldn’t have to. That’s why there’s TheAutomaticEarth.com.

A good one, which I posted December 12, with WTI at $67 (remember the gold old days, grandma?), was this one on what oil actually sells for out there, not what WTO and Brent standards say. An eye-opener.

Will Oil Kill The Zombies?

Tom Kloza, founder and analyst at Oil Price Information Service, said the market could bottom for the winter in about 30 days, but then it will be up to whatever OPEC does. “It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza.”The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel.”

“Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday. “In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.

Oil prices have come down close to another 20% since then, in just one month $67 to $46 right now. And it’s going to keep plunging, if only because Goldman belatedly woke up and said so today:

Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned

Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market. The bank cut its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year.. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York. The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom ..

“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.” West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter. Goldman reduced its six and 12-month WTI predictions to $39 a barrel and $65, from $75 and $80, respectively ..

Well, after that 2-month blooper I described above, who would trust Goldman anymore, right, silly you is thinking. Don’t be mistaken, people listen to GS, no matter how wrong they are.

Meanwhile, the thumbscrews keep on tightening:

UK Oil Firms Warn Osborne: Without Big Tax Cuts We Are Doomed

North Sea oil and gas companies are to be offered tax concessions by the Chancellor in an effort to avoid production and investment cutbacks and an exodus of explorers. George Osborne has drawn up a set of tax reform plans, following warnings that the industry’s future is at risk without substantial tax cuts. But the industry fears he will not go far enough. Oil & Gas UK, the industry body, is urging a tax cut of as much as 30% [..] “If we don’t get an immediate 10% cut, then that will be the death knell for the industry [..] Companies operating fields discovered before 1992 can end up with handing over80% of their profits to the Chancellor; post-1992 discoveries carry a 60% profits hit.

And hitting botttom lines:

As Oil Plummets, How Much Pain Still Looms For US Energy Firms?

A closer look at valuations and interviews with a dozen of smaller firms ahead of fourth quarter results from their bigger, listed rivals, shows there are reasons to be nervous. What small firms say is that the oil rout hit home faster and harder than most had expected. “Things have changed a lot quicker than I thought they would,” says Greg Doramus, sales manager at Orion Drilling in Texas, a small firm which leases 16 drilling rigs. He talks about falling rates, last-minute order cancellations and customers breaking leases. The conventional wisdom is that hedging and long-term contracts would ensure that most energy firms would only start feeling the full force of the downdraft this year.

The view from the oil fields from Texas to North Dakota is that the pain is already spreading. “We have been cut from the work,” says Adam Marriott, president of Fandango Logistics, a small oil trucking firm in Salt Lake City. He says shipments have fallen by half since June when oil was fetching more than $100 a barrel and his company had all the business it could handle. Bigger firms are also feeling the sting. Last week, a leading U.S. drilling contractor Helmerich & Payne reported that leasing rates for its high-tech rigs plunged 10% from the previous quarter, sending its shares 5% lower.

And, then, as yours truly predicted last fall, oil’s downward spiral spreads, and the entire – always nonsensical – narrative of a boost to the economy from falling oil prices vanishes into thin air. You could have known that, too, at least 2 months ago. Bloomberg:

Oil’s Plunge Wipes Out S&P 500 Earnings

While stock investors wait for the benefits of cheaper oil to seep into the economy, all they can see lately is downside. Forecasts for first-quarter profits in the Standard & Poor’s 500 Index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg. Reductions spread across nine of 10 industry groups and energy companies saw the biggest cut. Earnings pessimism is growing just as the best three-year rally since the technology boom pushed equity valuations to the highest level since 2010.

At the same time, volatility has surged in the American stock market as oil’s 55% drop since June to below $49 a barrel raises speculation that companies will cancel investment and credit markets and banks will suffer from debt defaults. [..] American companies are facing the weakest back-to-back quarterly earnings expansions since 2009 as energy wipes out more than half the growth and the benefit to retailers and shippers fails to catch up.

Oil producers are rocked by a combination of faltering demand and booming supplies from North American shale fields, with crude sinking to $48.36 a barrel from an average $98.61 in the first three months of 2014. Except for utilities, every other industry has seen reductions in estimates. Profit from energy producers such as Exxon Mobil and Chevron will plunge 35% this quarter, analysts estimated.

In October, analysts expected the industry to earn about the same as it did a year ago. “My initial thought was oil would take a dollar or two off the overall S&P 500 earnings but that obviously might be worse now,” Dan Greenhaus at BTIG said in a phone interview. “The whole thing has moved much more rapidly and farther than anyone thought. People were only taking into account consumer spending and there was a sense that falling energy is ubiquitously positive for the U.S., but I’m not convinced.”

Well, not than anyone thought. Not me, for one. Just than the ‘experts’ thought. But that’s exactly what I said at the time. And I must thank Bloomberg for vindicating me. Don’t worry, guys, I wouldn’t want to be part of your expert panel if my life depended on it. And it’s not about me wanting to toot my own horn either, tickling as it may be for a few seconds, but about the likes of TheAutomaticEarth.com, or ZeroHedge.com and WolfStreet.com and many others, getting the recognition we deserve. If you ask me, reading the finance blogosphere can save you a lot of money. That’s merely a simple conclusion to draw from the above.

And only now are people starting to figure out that the real economy may not have had any boon from lower oil prices either:

How Falling Gasoline Prices Are Hurting Retail Sales

Aren’t declining gasoline prices supposed to be good news for the economy? They certainly are to households not employed in the energy industry, but it might not seem so from the one of the biggest economic indicators due for release this week. On Wednesday, the Commerce Department is set to report retail sales for December. It’s the most important month of the year for retailers, but economists polled by MarketWatch are expecting a flat reading, and quite a few say a monthly decline wouldn’t be a surprise. [..] After department stores saw a 1% monthly gain in November, the segment may reverse some of that advance in the final month of the year.

This whole idea of Americans running rampant in malls with the cash they saved from lower prices at the pump was always just something somebody smoked. And now we’ll get swamped soon with desperate attempts to make US holiday sales look good, but if I were you, I’d take an idled oiltanker’s worth of salt with all of those attempts.

Still, the Fed, in my view, is set to stick with its narrative of the US economy doing so well they just have to raise interest rates. It’s for the Wall Street banks, don’t you know. That narrative, in this case, is “Ignore transitory volatility in energy prices.” The Fed expects for sufficient mayhem to happen in emerging markets to lift the US, and for enough dollars to ‘come home’ to justify a rate hike that will shake the world economy on its foundations but will leave the US elites relatively unscathed and even provide them with more riches. And if anyone wants to get richer, it’s the rich. They simply think they have it figured out.

Why Falling Oil Prices Won’t Delay Fed Rate Increases /span>

Financial markets have been shaken over the past several weeks by a misguided fear that deflation has imbedded itself not only into the European economy but the U.S. economy as well. Deflation is a serious problem for Europe, because the eurozone is plagued with bad debts and stagnant growth. Prices and wages in the peripheral nations (such as Greece and Spain) must fall still further in relation to Germany’s in order to restore their economies to competitiveness. But that’s not possible if prices and wages are falling in Germany (or even if they are only rising slowly).

In Europe, deflation will extend the economic crisis, but that’s not an issue in the United States, where households, businesses and banks have mostly completed the necessary adjustments to their balance sheets after the great debt boom of the prior decade. The plunge in oil prices will likely push the annual U.S. inflation rate below 1%, further from the Fed target of 2%. [..] Falling oil prices are a temporary phenomenon that shouldn’t alter anyone’s view about the underlying rate of inflation.

On Wednesday, the newly released minutes of the Fed’s latest meeting in December revealed that most members of the FOMC are ready to raise rates this summer even if inflation continues to fall, as long as there’s a reasonable expectation that inflation will eventually drift back to 2%. Fed Chairman Ben Bernanke got a lot of flak in the spring of 2011 when oil prices were rising and annual inflation rates climbed to near 4%, double the Fed’s target.

Bernanke’s critics wanted him to raise interest rates immediately to fight the inflation, but he insisted that the spike was “transitory” and that the Fed wouldn’t respond. Bernanke was right then: Inflation rates drifted lower, just as he predicted. Now the situation is reversed: Oil prices are falling, and critics of the Fed say it should hold off on raising interest rates. The Fed’s policy in both cases is the same: Ignore transitory volatility in energy prices.

There are all these press-op announcements all the time by Fed officials that I think can only be read as setting up a fake discussion between pro and con rate hike, that are meant just for public consumption. The Fed serves it member banks, not the American people, don’t let’s forget that. No matter what happens, they can always issue a majority opinion that oil prices or real estate prices, or anything, are only ‘transitory’, and so their policies should ignore them. US economic numbers look great on the surface, it’s only when you start digging that they don’t.

I see far too much complacency out there when it comes to interest rates, in the same manner that I’ve seen it concerning oil prices. We live in a new world, not a continuation of the old one. That old world died with Fed QE. Just check the price of oil. There have been tectonic shifts since over, let’s say, the holidays, and I wouldn’t wait for the ‘experts’ to catch up with live events. Being 7 weeks or two months late is a lot of time. And they will be late, again. It’s inherent in what they do. And what they represent.

Dec 182014
 
 December 18, 2014  Posted by at 10:07 pm Finance Tagged with: , , , , , ,  7 Responses »
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Arthur Rothstein “Quack doctor, Pittsburgh, Pennsylvania” May 1938

Isn’t it fun to just watch the market numbers roll by from time to time as you go about your day, see Europe markets up 3%+, Dubai 13%, US over 2% (biggest two-day rally since 2011!), and you just know oil must get hit again? Well, it did. WTI down another 3%+. I tells ya, no Plunge Protection is going save this sucker.

And oil is not even the biggest story today. It’s plenty big enough by itself to bring down large swaths of the economy, but in the background there’s an even bigger tale a-waiting. Not entirely unconnected, but by no means the exact same story either. It’s like them tsunami waves as they come rolling in. It’s exactly like that.

That is, in the wake of the oil tsunami, which is a long way away from having finished washing down our shores, there’s the demise of emerging markets. And I’m not talking Putin, he’ll be fine, as he showed again today in his big press-op. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. And make no mistake: to be a contender for bigger story than oil going into 2015, you have to be major league large. This one is.

The US dollar will keep rising more or less in and of itself, simply because the Fed has ‘tapered QE’, and much of what happened in global credit markets, especially in emerging markets, was based on cheap and easily available dollars. There’s now $85 billion less of that each month than before the taper took it away in $10 billion monthly increments. The core is simple.

This is not primarily government debt, it’s corporate debt. But it’s still huge, and it has not just kept emerging economies alive since 2008, it’s given them the aura of growth. Which was temporary, and illusionary, all along. Just like in the rest of the world, Japan, EU, US. And, since countries can’t – or won’t – let their major companies fail, down the line it becomes public debt.

One major difference from the last emerging markets blow-up, in the late 20th century, is size: emerging markets today are half the world economy. And they’re about to be blown to smithereens. Sure, oil will play a part. But mostly it will be the greenback. And you know, we can all imagine what happens when you blow up half the global economy …

Erico Matias Tavares at Sinclair has a first set of details:

Emerging Markets In Danger

There are some signs of trouble in emerging markets. And the money at risk now is bigger than ever. The yield spread between high grade emerging markets and US AAA-rated corporate debt has jumped, almost doubling in less than three weeks to the highest level since mid-2012.


MSCI Emerging Markets Index and Yield Spread between High Grade Emerging Markets and US AAA Corporates: 14 March 2003 – Today. Source: US Federal Reserve.

This means that the best credit names in emerging markets have to pay a bigger premium over their US counterparts to get funding. When this spread spikes up and continues above its 200-day moving average for a sustained period of time, it is typically a bad sign for equity valuations in emerging markets, as shown in the graph above. One swallow does not a summer make, but it is worthwhile keeping an eye on this indicator.

As yields go up the value of these emerging market bonds goes down, resulting in losses for the investors holding them. The surge of the US dollar in recent months could magnify these losses: if the bonds are denominated in local currency they will be worth a lot less to US investors; otherwise, the borrowers will now have to work a lot harder to repay those US dollar debts, increasing their credit risk. Any losses could end up being very significant this time around, as demand for emerging markets bonds has literally exploded in recent years.


Average Annual Gross Debt Issuance ($ billions, percent): 2000 – Today. Source: Dealogic, US Treasury. Note: Data include private placements and publicly-issued bonds. 2014 data are through August 2014 and annualized.

As the graph above shows, the issuance of emerging market corporate debt has risen sharply since the depths of the 2008-09 financial crisis.These volumes are very large indeed, and now account for non-trivial portions of investors’ and pension funds’ portfolios worldwide.

As a result, emerging markets corporations are now leveraged to the hilt, easily exceeding the 2008 highs by almost a multiple to EBITDA. And why not? With foreign investors desperate for yield as a result of all the stimulus and money printing by their central banks, they were only too happy to oblige. And they were not alone. Governments in these countries were also busy doing some borrowing of their own, as their domestic capital markets deepened.

[..] foreign investors have also piled into locally denominated bonds of emerging markets governments. Countries like Peru and Latvia now have over 50% foreign ownership of their bonds. [..] But there are big speculative reasons behind the recent money flows going into these countries – which could reverse very quickly should the tide turn. [..]

If investors end up rushing for the emerging markets exit for whatever reason, with this unprecedented level of exposure they might be bringing home much more than a bruised ego and an empty wallet. For one, European banks are hugely exposed to emerging markets. Any impairment to their books would likely make any new lending even more difficult, at a time when there is already a dearth of non-government credit in Europe.

And if emerging economies falter, where will the growth needed to repair Western government and private balance sheets come from? It used to be said that when the US economy sneezes the rest of the world catches a cold. Now it seems all we need is a hiccup in emerging markets.

That’s what you get when emerging markets are both half the global economy AND they’ve accomplished that level off of ultra-low US Fed interest rates and ultra-high US Fed credit ‘accommodation’. All you have to do when you’re the Fed is to take both away at the same time, and you’re the feudal overlord.

Our favorite friend-to-not-like Ambrose Evans-Pritchard does what he does well: provide numbers:

Fed Calls Time On $5.7 Trillion Of Emerging Market Dollar Debt

The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries.

Much of the debt was taken out at real interest rates of 1% on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots. The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.

Officials from the BIS say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia’s default and the East Asia Crisis. The difference this time is that emerging markets have grown to be half the world economy. Their aggregate debt levels have reached a record 175% of GDP, up 30 percentage points since 2009.

Most have already picked the low-hanging fruit of catch-up growth, and hit structural buffers. The second assumption was that China would continue to drive a commodity supercycle even after Premier Li Keqiang vowed to overthrow his country’s obsolete, 30-year model of industrial hyper-growth, and wean the economy off $26 trillion of credit leverage before it is too late. [..]

Stress is spreading beyond Russia, Nigeria, Venezuela and other petro-states to the rest of the emerging market nexus, as might be expected since this is a story of evaporating dollar liquidity as well as a US shale supply-glut.

[..[ the Turkish lira has fallen 12% since the end of November. The Borsa Istanbul 100 index is down 20% in dollar terms. Indonesia had to intervene on Wednesday to defend the rupiah. Brazil’s real has fallen to a 10-year low against the dollar, as has the index of emerging market currencies. Sao Paolo’s Bovespa index is down 23% in dollars in 3 weeks.

The slide can be self-feeding. Funds are forced to sell holdings if investors take fright and ask for their money back, shedding the good with the bad. Pimco’s Emerging Market Corporate Bond Fund bled $237m in November, and the pain is unlikely to stop as clients discover that 24% of its portfolio is in Russia.

One might rail against the injustice of indiscriminate selling. Such are the intertwined destinies of countries that have nothing in common. The Fed has already slashed its bond purchases to zero, withdrawing $85bn of net stimulus each month. It is clearly itching to raise rates for the first time in seven years. This is the reason why the dollar index has jumped 12% since May, smashing through its 30-year downtrend line, a “seismic change” in the words of HSBC. [..]

World finance is rotating on its axis, says Stephen Jen, from SLJ Macro Partners. The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar.

“Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers.

Hold it there for a moment. I don’t think it’s the US economy (its recovery is fake), it’s the US dollar.

Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015,” he said.

This time the threat does not come from insolvent states. They have learned the lesson of the late 1990s. Few have dollar debts. But their companies and banks most certainly do, some 70% of GDP in Russia, for example. This amounts to much the same thing in macro-economic terms. Private debt morphs into state debt since governments cannot allow key pillars of their economies to collapse.

These countries have, of course, built $9 trillion of foreign reserves, often the side-effect of holding down their currencies to gain export share. This certainly provides a buffer. Yet the reserves cannot fruitfully be used in a recessionary crisis because sales of foreign bonds automatically entail monetary tightening. [..] .. these reserves are a mirage. If you deploy them in such circumstances, you choke your own economy unless you can sterilize the effects. [..]

Investors are counting on the European Central Bank to keep the world supplied with largesse as the Fed pulls back. Yet the ECB could not pick up the baton even if it were to launch a blitz of quantitative easing, and there is no conceivable consensus for action on such a commensurate scale.

The world’s financial system is on a dollar standard, not a euro standard. Global loans are in dollars. The US Treasury bond is the benchmarks for global credit markets, not the German Bund. Contracts and derivatives are priced off dollar instruments. Bank of America says the combined monetary stimulus from Europe and Japan can offset only 30% of the lost stimulus from the US.

What more can I say? This is the lead story as we go into 2015 two weeks from today. Oil will help it along, and complicate as well as deepen the whole thing to a huge degree, but the essence is what it is: the punchbowl that has kept world economies in a zombie state of virtual health and growth has been taken away on the premise of US recovery as Janet Yellen has declared it.

It doesn’t even matter whether this is a preconceived plan or not, as some people allege, it still works the same way. The US gets to be in control, for a while, until it realizes, Wile E. shuffle style, that you shouldn’t do unto others what you don’t want to be done unto you. But by then it’ll be too late. Way too late.

As I wrote just a few days ago in We’re Not In Kansas Anymore, there’s a major reset underway. We’re watching, in real time, the end of the fake reality created by the central banks. And it’s not going to be nice or feel nice. It’s going to hurt, and the lower you are on the ladder, the more painful it will be. Be that globally, if you live in poorer countries, or domestically, if you belong to a poorer segment of the population where you are. In both senses, the poorest will be hit hardest.

It’s the new model along which the clowns we allow to run the show, do so. Unless ‘we the people’ take back control, it’s pretty easy to see how this will go down.

Dec 022014
 
 December 2, 2014  Posted by at 12:13 pm Finance Tagged with: , , , , , , ,  3 Responses »
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‘Daly’ Store, Manning, South Carolina July 1941

Canadian Natural Resources Chairman Sees Oil Touching $30 A Barrel (NatPost)
Banks’ $650 Billion Bet On Oil Backfires As Brent Prices Slump (Telegraph)
Billionaire Shale Pioneer Sees Drilling Slowdown on Oil Price Drop (Bloomberg)
US Shale Crude Exports To Asia Grind To Halt On Flood Of Mideast Oil (Reuters)
October Oil Shale Permits Drop 15%: Is The Slowdown Here? (Reuters)
As Crude Tumbles, Oil Drillers Seek To Temporarily Idle More Rigs (Reuters)
For Oil Companies, It’s Survival Of The Fittest (MarketWatch)
Beware the Vulnerable Oil Debt That Lurks in Your Junk-Bond ETFs (Bloomberg)
Oil Investors May Be Running Off a Cliff They Can’t See (BW)
Bank Of England Investigating Risk To Banks Of ‘Carbon Bubble’ (Guardian)
Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery (Bloomberg)
Why The Commodities Selloff May Continue In 2015 (CNBC)
Europe Debates Third Bailout Package for Greece (Spiegel)
European Banks Seen Afflicted by $82 Billion Capital Gap (Bloomberg)
Leak at Federal Reserve Revealed Confidential Bond-Buying Details (ProPublica)
The Return Of Currency Wars Will Strengthen The US Dollar Even More (Roubini)
Japanese Workers See Wages Drop for 16th Month (Bloomberg)
Putin: EU Stance Forces Russia To Withdraw From South Stream Project (RT)
Russia Intervenes As Crumbling Ruble Echoes 1998 Debt Crisis (Guardian)
Russia Says NATO Destabilizes North Europe, Aid Draws Ire (Bloomberg)
North Korea Refuses To Deny Sony Pictures Cyber-Attack (BBC)
Kim Dotcom Avoids Jail After Bail Hearing (NZ Herald)

The threat here is not about the oil, it’s about the financing. Junk bonds, loans, oil stocks etc. The whole industry is leveraged up to its neck. It’s an extremely brittle system that can’t take shocks.

Canadian Natural Resources Chairman Sees Oil Touching $30 A Barrel (NatPost)

Canada’s oil industry faces a year of “tough slugging,” including the deferment of many projects, as oil prices collapse to as little as US$30 a barrel then likely stabilize around US$70 to US$75 a barrel, oil entrepreneur Murray Edwards predicted Friday. Because of its high costs, the Canadian sector will be impacted more than many oil-producing jurisdictions around the world by OPEC’s decision Thursday to not cut oil production, said Mr. Edwards, the chairman of Canadian Natural Resources and one of Canada’s single biggest oil investors. Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time “On a given day you can have market fluctuations where prices fluctuate far more than the underlying economic value of the unit,” Mr. Edwards told reporters on the sidelines of a business forum here.

“Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time,” he said. “I don’t believe that if it spikes down that low, that it will stay that low for long, because you will see increased demand and supply respond. “The better question is where does it stabilize, and that $70-$75 area is probably not a bad place to stabilize for a period of time until you get more balance in term of growth in demand and some supply response.” Mr. Edwards said industry projects that are already under way, particularly oil sands projects with a long-term horizon and capital already invested, will likely continue. But others will be shelved until there is more clarity around future oil prices. There will also be a slowdown in conventional oil projects, particularly those that tend to produce a lot at the front end, he predicted.

Weak oil prices will force the industry to refocus and look at new way of doing things to cut costs, he said. Canadian Natural Resources, one of Canada’s top oil and gas producers, will adjust its capital spending next year to reflect weaker oil prices, he said. The company recently approved an $8.5-billion capital budget for 2015, including $2-billion in flexible capital, based on oil averaging around US$81 for West Texas Intermediate. Overtime, markets will find a new balance as low oil prices stimulate demand. “Right now we have more supply than we have demand for a period of time,” he said. “The market is now going to find a price which best reflects what it costs to produce a barrel of oil … nothing solves low prices like low prices.”

Read more …

” .. a collapse in the oil price is far more dangerous for the banks than it would have been only a few years ago.”

Banks’ $650 Billion Bet On Oil Backfires As Brent Prices Slump (Telegraph)

British banks face losses of more than £2bn as risky loans to the oil and gas industry go sour amid the plummeting price of crude. Banks have piled into the sector over the last three years, with oil and gas accounting for £11 of every £100 of high-yield debt on the back of America’s booming shale industry. However, oil’s precipitous decline since June has left many of the lenders looking at heavy losses. Brent Crude prices fell to a low of $67.53 yesterday, the lowest level for almost five years. The price rebounded by around 2pc as of Monday afternoon but remains almost 40pc down since June. Last week, Opec leaders decided against restricting output in an attempt to squeeze North America’s shale producers – many of whom have borrowed heavily to invest. Although much of the banks’ exposure will have been hedged off, Barclays, RBS, HSBC and Standard Chartered could face a combined $3.4bn (£2bn) of impairment charges related to oil and gas exposures in the fourth quarter of the year, according to Chirantan Barua, an analyst at Bernstein.

“Nearly $650bn of high yield debt has been issued in the sector since 2011,” Mr Barua said. “While the broader high yield market is down [around] 20pc year-to-date, oil and gas has been flat with issuance running straight up to the OPEC event. [This] can’t be a good thing for a sudden stress in the market if oil prices stay at this level.” When you see $650bn of high yield issuance in a sector that has been levering up across the supply chain, any shocks in the underlying business will have risk ripples across the financial system.” While Barclays, HSBC and RBS could be sitting on losses of $1bn each, and Standard Chartered faces $400m of impairments, banks in North America could face much bigger impairment charges. US and Canadian banks that have lent heavily to the sector on the back of the US shale boom, and high-yield debt to less stable oil companies has increased substantially. This means a collapse in the oil price is far more dangerous for the banks than it would have been only a few years ago.

Read more …

“They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”

Billionaire Shale Pioneer Sees Drilling Slowdown on Oil Price Drop (Bloomberg)

Billionaire wildcatter Harold Hamm, a founding father of the U.S. shale boom whose personal fortune has fallen by more than half in the past three months, said U.S. drilling will slow as producers cut back amid falling oil prices. Declining activity from Texas to North Dakota won’t be as harmful to the industry as some have feared, the chairman and chief executive officer of Continental Resources Inc. said. OPEC’s refusal to curb output last week bodes well for U.S. producers that can outlast countries in the cartel, which depend on higher oil prices. “Will this industry slow down? Certainly,” Hamm said yesterday in a telephone interview. “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”

Investors have been spooked as oil has declined to a five-year low. The downturn comes after prices above $100 a barrel sparked a boom in output from U.S. shale formations that helped create a glut of supply. Hamm’s wealth, which is largely tied to the fate of Oklahoma City-based Continental, has fallen by more than $12 billion in three months, according to the Bloomberg Billionaires Index. Hamm, who helped discover the potential of North Dakota’s Bakken formation, predicted a swift recovery in oil prices, which have declined more than 36 percent since June as Saudi Arabia and its allies in the Organization of Petroleum Exporting Countries refused to cut production last week to help re-balance the market. The company said last month it’s sold nearly all its hedges through 2016, in a bet on a recovery in prices. West Texas Intermediate, the U.S. benchmark, fell below $65 a barrel yesterday before settling up 4.3 percent to $69.

Read more …

Well, we all like a little competition, don’t we?

US Shale Crude Exports To Asia Grind To Halt On Flood Of Mideast Oil (Reuters)

An aggressive strategy by Mideast Gulf producers to exploit the lowest oil prices in five years to defend market share is showing signs of bearing fruit as U.S. crude exports to Asia grind to halt. Asian refineries have suspended imports of condensate, a light crude oil produced from the U.S. shale boom, just four months after they began in favor of cheaper Middle East grades, according to trade and industry sources. The suspension illustrates how competition between suppliers has heated up following a more than 40% decline in oil prices since June.

Last week Ali al-Naimi, the oil minister of OPEC kingpin Saudi Arabia, warned his fellow OPEC members they must combat the U.S. shale boom. He argued against cutting OPEC production so as to keep prices depressed and undermine the profitability of North American producers. “There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the U.S. anymore,” said Tushar Tarun Bansal of consultancy FGE in Singapore. U.S. oil became uncompetitive against similar grades from Qatar, Saudi Arabia and the United Arab Emirates after Gulf producers began dropping prices in August to maintain their market share in an oil market glut.

Read more …

We’ll see a lot more restructuring and defaults, a lot less financing, and a lot less exploration and drilling.

October Oil Shale Permits Drop 15%: Is The Slowdown Here? (Reuters)

U.S. oil producers have been racing full-speed ahead to drill new shale wells in recent years, even in the face of lower oil prices. But new data suggests that the much-anticipated slowdown in shale country may have finally arrived. Permits for new wells dropped 15% across 12 major shale formations last month, according to exclusive information provided to Reuters by DrillingInfo, an industry data firm, offering the first sign of a slowdown in a drilling frenzy that has seen permits double since last November. OPEC last week agreed to maintain its production quota of 30 million-barrels-per-day, despite a 30% drop in oil prices since June, triggering an additional 10% decline. That move, many analysts believe, was squarely aimed at U.S. oil producers driving the country’s energy resurgence: can they continue drilling at the current pace if prices don’t rise? “Currently, the market is focused on U.S. shale as the place where spending and production must be curtailed,” Roger Read, a Wells Fargo analyst, said in a note Friday.

“There is little doubt, in our view, that lower oil and gas prices will result in lower spending and lower shale production in 2015 to 2017.” A cutback of U.S. production could play into the hands of Saudi Arabia, which has suggested over the past few months that it is comfortable with much lower oil prices. Most analysts predict U.S. oil producers can maintain their healthy production rates in the first half of 2015 – thanks in part to investments made months ago. Some oil service companies have suggested that a slowdown might be held off, as they continue to buy key drilling components. But, the data suggests that production is likely to eventually succumb to lower prices. “The first domino is the price, which causes other dominos to fall,” said Karr Ingham, an economist who compiles the Texas PetroIndex, an annual analysis of the state’s energy economy. One of the first tiles to drop: the number of permits issued, Ingham said.

Read more …

“The day rate for a top specification drillship, which can work in water up to 12,000 feet (3,658 meters) deep, was recently quoted at as low as $400,000, down from $600,000 last year.” [..] “The global fleet of jackup rigs is forecast to grow 9% in 2015 and another 7% in 2016 .. ” Overinvestment is what you get when credit is too cheap. It turns the whole world into a casino, and everyone into a gambler. And then they all lose.

As Crude Tumbles, Oil Drillers Seek To Temporarily Idle More Rigs (Reuters)

Offshore drillers globally are increasingly considering “warm stacking” their rigs to take them temporarily off the market, as they gear up for a slowdown in the hunt for oil with crude prices sliding to five-year lows. Rigs in warm stack maintain basic operations and most of the crew, and can be put to use once the owner gets a contract. Drillers put rigs in warm stacks to lower operational costs and also to keep them sufficiently ready for quick deployment, meaning they are hopeful a downturn won’t be a prolonged one. Rigs can also be “cold stacked”, or shut down, which typically happens when an owner does not expect to find work for an extended period of time.

“Six months ago, no one talked about stacking rigs,” said Thomas Tan, chief executive officer at Kim Heng Offshore & Marine Holdings, a Singapore-based oilfield service firm, “In the last few weeks, things have become scarier and the talk of stacking started.” Tan said his firm has received enquiries to stack dozens of rigs over the past few weeks. Kim Heng currently services four rigs in warm stack around Singapore. The company serves about 60 rigs a year in different stage of operations, including providing repair, maintenance and logistics services. “A lot of people are looking at warm stack, as they hope that the market will turn around quickly,” Tan said. “Cold stack is on their mind… but they haven’t given up hope yet.” [..]

The day rate for a top specification drillship, which can work in water up to 12,000 feet (3,658 meters) deep, was recently quoted at as low as $400,000, down from $600,000 last year. Even rates for jack-up rigs, generally working in water depth below 400 feet, have started to weaken in recent months after holding up relatively well earlier in the year. Rig orders soared in recent years when oil prices topped $100 per barrel, making it more profitable to explore in hard-to-reach underwater areas. The global fleet of jackup rigs is forecast to grow 9% in 2015 and another 7% in 2016, Oslo-based investment bank Pareto Securities estimated.

Read more …

Darwin looms over fossils. Sort of fitting.

For Oil Companies, It’s Survival Of The Fittest (MarketWatch)

It looks like it may be a long winter on the oil patch. Companies are dusting off contingency plans that may have seemed far-fetched when oil was trading above $100 a barrel in the summer. Oil-well and land portfolios are coming under renewed scrutiny as they decide where to wait it out and where to continue production. Survival of the fittest is the term being used by investors and analysts as they try to figure out what’s next after the Organization of the Petroleum Exporting Countries last week decided to keep its production levels unchanged, sending crude futures down 10% on Friday. Prices recovered some of those losses on Monday, with New York-traded oil closing at $69 a barrel after testing lows below $65 a barrel earlier in the session. “We are on the edge of what people are comfortable with,” said Meredith Annex, an analyst with research firm Bloomberg New Energy Finance. U.S. drilling is likely to continue if prices hold around $70 to $75 a barrel, she said.

Below $65, however, companies will cut production and move away from the newer, less developed shale plays in the U.S., and even from the fringes of the more established shale areas like the Permian basin in Texas and North Dakota’s Bakken basin, she said. The U.S. would then import more crude until prices come back up again. Analysts at Tudor Pickering Holt told investors to find shelter in “liquid names with high quality assets and healthy balance sheets that can weather the 2015 storm.” Tudor and others are expecting oil prices to stabilize around $70 a barrel in the coming weeks or months. Last week’s steep decline was probably exaggerated by thin U.S. trading around Thursday’s Thanksgiving holiday, they said. [..]

Energy is a cyclical business, and adjusting production to lower prices and lower demand is not uncommon — companies did exactly that in 2008 and 2009, when oil prices collapsed during the recession. This year, however, companies were convinced in the spring and summer that prices would remain around $90 a barrel, said Reid Morrison, energy consultant with PwC. U.S. companies are likely poring over their portfolios now to figure out which wells they can afford to shut down, to ditch, or even to sell. Idling a well, from a purely technical viewpoint, is relatively easy. But it gets complicated when companies have to factor in the financing structure and tens of thousands of land leases, each carrying different obligations and time frames, said Morrison. “Every exploration and production company is doing a detailed review of their leases and rationalizing their portfolio as we speak,” Morrison said. In some cases, selling the land lease might be the answer, he said.

Read more …

Check your pension plans!

Beware the Vulnerable Oil Debt That Lurks in Your Junk-Bond ETFs (Bloomberg)

It pays to look a little closer at your investments in exchange-traded high-yield funds right now to find out just how exposed you are to plunging oil prices. Take State Street’s $9.8 billion junk-bond ETF that trades under the ticker JNK. It’s lost almost twice as much as a broad index of high-yield debt since the end of August, partly because its bigger allocation to energy companies has been a drag as oil prices plummet to the lowest since 2009. Individuals and institutions alike have gravitated toward ETFs as a quick way to enter infrequently-traded bond markets. Those who piled into speculative-grade bonds may not have realized their fortunes are, more than ever, tied to the outlook for oil given energy companies account for a record proportion of the market. “As oil prices have fallen further, reality has struck,” UBS analysts Matthew Mish and Stephen Caprio wrote in a Nov. 26 report. “For high yield, we expect that spreads and flows will be quite sensitive to oil prices at these levels. Further price declines would significantly raise expected default rates.”

Oil has collapsed into a bear market as the U.S. pumps crude at the fastest rate in three decades at the same time that global growth is slowing. OPEC resisted calls from members including Venezuela and Iran to reduce its production target when it met last week in Vienna, prompting West Texas Intermediate crude to fall below $65 dollars a barrel from more than $80 at the end of October and a high of $107 in mid-June. While some still like riskier U.S. bonds — such as Morgan Stanley (MS) analysts who today recommended buying the securities — the debt has suffered losses in the past five months as concern mounts that dropping energy costs will leave speculative shale drillers unable to meet their obligations.

Read more …

The stranded assets issue due to climate agreements is starting to make people nervous. Investors are preparing to get out. Lower prices might (should) be just what they need to make the decision.

Oil Investors May Be Running Off a Cliff They Can’t See (BW)

A major threat to fossil fuel companies has suddenly moved from the fringe to center stage with a dramatic announcement by Germany’s biggest power company and an intriguing letter from the Bank of England. A growing minority of investors and regulators are probing the possibility that untapped deposits of oil, gas and coal – valued at trillions of dollars globally – could become stranded assets as governments adopt stricter climate change policies. The concept gaining traction from Wall Street to the City of London is simple. Limits on emissions of carbon dioxide will be necessary to hold temperature increases to 2 degrees Celsius, the maximum climate scientists say is advisable. Without technologies to capture the waste gases from combusting fossil fuels, a majority of known oil, gas and coal deposits would have to stay underground. Once that point is reached, they become stranded.

With representatives from more than 190 countries gathered to discuss climate rules in Lima, the argument that burning all the world’s known oil, gas and coal reserves would overwhelm the atmosphere is moving beyond the realm of environmental activists. Storebrand), a Scandinavian financial services company managing $74 billion of assets, announced last year that it would divest from 19 fossil fuels companies. That list has since expanded to 35, including 15 coal producers, 10 oil-sand miners and 10 utilities that predominantly use coal. “It was a financial and climate-related decision, and there was very much a consideration of stranded assets,” Christine Torklep Meisingset, Storebrand’s head of sustainable investments, said by phone from Oslo. “Companies that specialize in carbon-intense projects are very vulnerable to climate policy and shifting regulations.”

Read more …

“In May, Carbon Tracker reported that over $1 trillion is currently being gambled on high-cost oil projects that will never see a return if the world’s governments fulfil their climate change pledges.”

Bank Of England Investigating Risk To Banks Of ‘Carbon Bubble’ (Guardian)

The Bank of England is to conduct an enquiry into the risk of fossil fuel companies causing a major economic crash if future climate change rules render their coal, oil and gas assets worthless. The concept of a “carbon bubble” has gained rapid recognition since 2013, and is being taken increasingly seriously by some major financial companies including Citi bank, HSBC and Moody’s, but the Bank’s enquiry is the most significant endorsement yet from a regulator. The concern is that if the world’s government’s meet their agreed target of limiting global warming to 2C by cutting carbon emissions, then about two-thirds of proven coal, oil and gas reserves cannot be burned. With fossil fuel companies being among the largest in the world, sharp losses in their value could prompt a new economic crisis. Mark Carney, the bank’s governor, revealed the enquiry in a letter to the House of Commons environment audit committee (EAC), which is conducting its own enquiry. He said there had been an initial discussion within the bank on “stranded” fossil fuel assets.

“In light of these discussions, we will be deepening and widening our enquiry into the topic,” he said, involving the financial policy committee which is tasked with identifying systemic economic risks. Carney had raised the issue at a World Bank seminar in October. News of the Bank’s enquiry comes on the day that global negotiations on climate change action open in Lima, Peru, and as one of Europe’s major energy companies E.ON announced it was to hive off its fossil fuel business to focus on renewables and networks. The UN’s Intergovernmental Panel on Climate Change recently warned that the limit of carbon emissions consistent with 2C of warming was approaching and that renewable energy must be at least tripled. “Policy makers and now central banks are waking up to the fact that much of the world’s oil, coal and gas reserves will have to remain in the ground unless carbon capture and storage technologies can be developed more rapidly,” said Joan Walley MP, who chairs the EAC.

“It’s time investors recognised this as well and factored political action on climate change into their decisions on fossil fuel investments,” she told the Financial Times. Anthony Hobley, chief executive of thinktank Carbon Tracker which has been prominent in analysing the carbon bubble, said the bank’s latest move could lead to important changes. “Fossil fuel companies should be disclosing how many carbon emissions are locked up in their reserves,” he said. “At the moment there is no consistency in reporting so it’s difficult for investors to make informed decisions.” Both ExxonMobil and Shell said earlier in 2014 that they did not believe their fossil fuel reserves would become stranded. In May, Carbon Tracker reported that over $1tn is currently being gambled on high-cost oil projects that will never see a return if the world’s governments fulfil their climate change pledges.

Read more …

“The sharp drop in oil prices will help boost consumer spending ..” I don’t understand that: we’re talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?

Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery (Bloomberg)

The sharp drop in oil prices will help boost consumer spending and underpin an economy that still requires patience before interest rates are increased, Federal Reserve Bank of New York President William C. Dudley said. “It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech today at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.” Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.”

Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance. Crude oil suffered its biggest drop in three years after OPEC signaled last week it will not reduce production. Lower energy costs “will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending,” Dudley said. The drop will especially help lower-income households, who are more likely to spend and not save the extra real income, he said. Lower energy prices have already helped speed U.S. growth. Manufacturing in the U.S. expanded in November at a faster pace than projected, according to the Institute for Supply Management’s factory index.

[..] He also tried to disabuse investors of the notion that the Fed would, in times of sharp equity declines, ease monetary conditions, an idea known as the “Fed put.” “The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky,” Dudley said. That could cause investors to push equity markets higher, contributing to a bubble, he said. “Let me be clear, there is no Fed equity market put,” he said.

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It’s simply a balloon deflating.

Why The Commodities Selloff May Continue In 2015 (CNBC)

Several of the world’s key commodities – including oil, gas, gold and corn – have been suffering the worst months of trading since the commodities crash of 2008. Back then, the main reason for downturn in prices was obvious: the credit crisis and subsequent panic about global economic growth. Yet today, while global growth is more sluggish than hoped in certain parts of the world – particularly in China – the overall economic picture seems much brighter than in 2008. In 2014, the focus seems to have switched to supply, as OPEC pledges to keep supply constant despite plunging oil prices. As well as being interpreted as throwing down the supply gauntlet to the shale-rich U.S., the OPEC move has been criticised for apparently penalizing several of its members.

Ultimately, it looks like investment decisions in the developed world may be causing the commodities glut. “Increasingly the supply side counts more, as investment cycles are creating persistent gluts in some areas (e.g. oil, natural gas, iron ore, grains) and lagging investment is starting to result in tightening elsewhere (industrial metals in general, copper in particular),” commodities analysts at Citi wrote in a research note. Despite the focus on emerging markets, the Citi analysts argue that continuing weakness in 2015 will have a “Made in America” quality, and called an end to “the era of $100 a barrel oil.” With grains, better weather conditions than for years meant better-than-expected crops, which “should leave inventories chock-a-block for a good year or two,” according to Citi.

The classic, straightforward analysis of commodity supply-demand dynamics would argue that, with cheaper commodities and cheaper prices, demand from consumers who feel like they’re getting a bargain will subsequently grow, sending prices up again. Unfortunately for miners and other commodities-linked companies, who have seen share price falls already this week, this may not be the case in 2015. “This fall in prices seems demand rather than supply led and so any benefit (to consumers) will be negated by the declining world growth outlook,” Rabobank strategists argue.

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Anyone still keeping count?

Europe Debates Third Bailout Package for Greece (Spiegel)

It’s no accident that “pathos” is a Greek word. Greek Prime Minister Antonis Samaras, at least, is a politician who is fond of sprinkling his speeches with the kind of emotional appeal that Aristotle long ago identified as an effective stylistic device. “The era of bailout packages is ending,” Samaras promised in September during an appearance in Thessaloniki. “Greece is now welcoming the new Greece.” Samaras knew the line would guarantee him applause from his audience, but the promise also came a bit prematurely. Following the announcement, Greece got a small taste of what it might mean were Greece were released from the oversight of the troika, comprised of the European Commission, the ECB and the IMF. The more often Samaras spoke of a “clean solution,” the more yields rose on long-term Greek government bonds. At the beginning of September, the rates had been 5.8%, but they soon climbed to almost 9%. It was the financial markets’ way of hinting that it is still too early to grant Greece full fiscal independence.

One high-ranking EU official compared the situation to a patient who has survived intensive care but wants to leave the hospital early. A relapse is certain and the subsequent care will be much more involved than if the patient had stayed in the hospital long enough for full recovery. Greece’s second bailout package officially ends in a month’s time, but it is already certain that the country will require additional funding from its EU partners. Last Wednesday in Paris, there was a minor uproar when troika officials made it known that they felt Greece hadn’t fulfilled conditions for the payout of the final tranche from the second bailout package. Athens’ international creditors determined the country will fall around €2 billion ($2.5 billion) short of reaching its commitment of not exceeding a budget deficit of 3% of gross domestic product. The Greeks, for their part, accused the troika of being overly critical, arguing that in the past, the situation had developed more positively than predicted by pessimists.

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More creative accounting. And another completely useless stress test. A new capitalization standard that goes into effect in 2015 was not applied to banks in 2014. Idiots.

European Banks Seen Afflicted by $82 Billion Capital Gap (Bloomberg)

Europe’s latest bank stress test was flawed, and dozens of the region’s lenders, including Deutsche Bank and BNP Paribas, aren’t sufficiently capitalized to improve the economy’s anemic growth or withstand a repeat of the 2008 financial crisis. Those are the conclusions of analysts at Keefe, Bruyette & Woods and the Danish Institute for International Studies who looked at what would have happened if the ECB had applied a leverage minimum that will be introduced next year. A third study by the Centre for European Policy Studies showed Deutsche Bank and BNP Paribas above the cutoff, while 28 other banks that passed the stress test failed. The new standard requires banks around the world to have capital equal to 3% of total assets, complementing a system that weights them for risk.

If the ECB had used that yardstick and demanded the highest quality capital, 12 big European banks that passed the stress test would need to raise an additional €66 billion ($82 billion), according to Jakob Vestergaard, a senior researcher at the Danish institute. “Relying on risk-based measures only isn’t enough because it’s always what we thought wasn’t risky that ends up blowing up during a crisis,” said Vestergaard, who examined data collected by the ECB at the request of Bloomberg News and has published papers on leverage. “The ECB wanted to appear tough, but it still couldn’t show big German, French banks as undercapitalized for political reasons.”

The ECB didn’t subject bank leverage ratios to the stress test’s adverse economic scenario because European lenders only have to report those numbers on an informational basis starting next year, a spokeswoman for the central bank in Frankfurt said. The new international standard approved by the Basel Committee on Banking Supervision won’t be fully binding until 2018. When it released test results on Oct. 26, the ECB provided leverage data that showed 14 lenders, including Deutsche Bank, were below the 3% minimum. Three more fell short after the central bank’s asset-quality review determined how many loans should be considered nonperforming. Combining the results of the independent studies, almost three times as many banks would fail the stress test if the leverage standard were used.

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And why does it take 2 years to get this out into the open?

Leak at Federal Reserve Revealed Confidential Bond-Buying Details (ProPublica)

The Federal Reserve sprung a previously unreported leak in October 2012, when potentially market-moving information about highly confidential monetary deliberations made its way into a financial analyst’s private newsletter. The leak occurred the day before the scheduled public release of meeting minutes that shed new light on the Fed’s decision to embark on a third round of bond buying to boost the economy, ProPublica has learned. The newsletter revealed what the minutes would say the next day as well as fresh details about the Fed’s internal plans and deliberations – information that could have provided traders with an edge. Leaks from inside the Fed are considered a serious matter. In the past, they have prompted Congressional concern and triggered the involvement of federal law enforcement. In this instance, then Fed Chairman Ben Bernanke instructed the central bank’s general counsel to look into the matter.

The Federal Reserve has faced criticism in recent years for its information security practices, with some in Congress questioning whether it operates under sufficient oversight. The October 2012 leak involved deliberations of the Federal Open Markets Committee, which holds eight regularly scheduled meetings per year to set policies that control inflation and keep the economy growing. Since the 2008 economic crisis, it has involved itself more deeply in financial markets. Minutes of the committee’s meetings are released promptly at 2 p.m. three weeks after it meets. Fed watchers eagerly await the event and parse every word for clues on how financial markets will move. The Fed tightly guards nonpublic information about deliberations by the committee and the select staffers who are privy to them, about five dozen people in all. Doing so is critical to “reinforce the public’s confidence in the transparency and integrity of the monetary process,” the Fed’s policy on external communications says. [..]

The newsletter containing the leaked material came from an economic policy intelligence firm called Medley Global Advisors whose clients include hedge funds, institutional investors and asset managers. On Oct. 3, 2012, Regina Schleiger, an analyst with the firm, sent clients a “special report” titled “Fed: December Bound.” The report focused on the Sept. 12-13 open market committee meeting, where the panel had approved what’s called “QE3,” a new program of large-scale purchases of mortgage-backed and Treasury securities. Typically, the Fed chairman holds a news conference following the meetings to help explain the committee’s actions. But when Bernanke did this on Sept. 13, he did not reveal the depth of disagreement within the committee about how effective the bond-buying program would be and whether it was worth the cost. Schleiger wrote, however, that the minutes due out the next day would reveal “intense debate between Federal Open Market Committee participants.”

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Roubini’s not much of an analyst anymore, it’s all Keynes ‘austerity killed the cat’ all the way, a one dimensional focus on growth that is so abundant today. To claim, for example, that Japan’s sales tax hike in April ‘killed the recovery’ is an opinionated opinion, at best. Japan’s problems are far too deep to be either solved or aggravated by a 3% extra sales tax. But it’s the sort of opinion that gets Nouriel re-invited to Basel and all those places where the rich meet.

The Return Of Currency Wars Will Strengthen The US Dollar Even More (Roubini)

The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world. Central banks in China, South Korea, Taiwan, Singapore and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating. All of this will lead to a strengthening of the U.S. dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year.

But if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation. You can lead a horse to liquidity, but you can’t make it drink. The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth. Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and, thus, private consumption. In the eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the IMF and the ECB have been a massive impediment to growth.

In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year. In the U.S., a budget sequester and other tax-and-spending policies led to a sharp fiscal drag in 2012-2014. And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year. Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking. But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and, thus, undermining growth.

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Wages have been falling for much longer.

Japanese Workers See Wages Drop for 16th Month (Bloomberg)

Japanese wages adjusted for inflation dropped for a sixteenth straight month as Prime Minister Shinzo Abe faces an election focused on his efforts to spur economic growth. Earning declined 2.8% in October from a year earlier, the labor ministry said today, following data last week showing households cut spending for a seventh month. Abe’s call for companies to use their cash holdings on salaries and investment has been partially met, with capital spending among manufacturers rising while wages change little. He faces voters on Dec. 14 with an economy that fell into recession following a sales-tax increase and opposition parties highlighting the difficulties of low-income earners.

“With the effect of the sales tax hike, I don’t see real wages rising in the financial year through April,” said Toru Suehiro, an economist at Mizuho Securities. “People will be asking themselves whether they feel better off, and there probably aren’t that many who think the economy has got better.” Before adjusting for inflation, average monthly pay in October rose 0.5% from a year earlier to 267,935 yen ($2,260). Large Japanese companies will raise winter bonuses by 5.8% this year, according to the preliminary results of a survey by the Keidanren business lobby group. Abe said yesterday that Keidanren has promised to lift pay next year.

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The EU shoots itself in the foot. And Russia gets angrier. Gazprom spent billions preparing the South Stream line. Dmitry Orlov said from now on to expect things from Russia that no-one expects.

Putin: EU Stance Forces Russia To Withdraw From South Stream Project (RT)

Russia is forced to withdraw from the South Stream project due to the EU’s unwillingness to support the pipeline, and gas flows will be redirected to other customers, Vladimir Putin said after talks with his Turkish counterpart, Recep Tayyip Erdogan. “We believe that the stance of the European Commission was counterproductive. In fact, the European Commission not only provided no help in implementation of [the South Stream pipeline], but, as we see, obstacles were created to its implementation. Well, if Europe doesn’t want it implemented, it won’t be implemented,” the Russian president said. According to Putin, the Russian gas “will be retargeted to other regions of the world, which will be achieved, among other things, through the promotion and accelerated implementation of projects involving liquefied natural gas.”

“We’ll be promoting other markets and Europe won’t receive those volumes, at least not from Russia. We believe that it doesn’t meet the economic interests of Europe and it harms our cooperation. But such is the choice of our European friends,” he said. The South Stream project is at the stage when “the construction of the pipeline system in the Black Sea must begin,” but Russia still hasn’t received an approval for the project from Bulgaria, the Russian president said. Investing hundreds of millions of dollars into the pipeline, which would have to stop when it reaches Bulgarian waters, is “just absurd, I hope everybody understands that,” he said. Putin believes that Bulgaria “isn’t acting like an independent state” by delaying the South Stream project, which would be profitable for the country.

He advised the Bulgarian leadership “to demand loss of profit damages from the European Commission” as the country could have been receiving around €400 million annually through gas transit. Putin said that Russia is ready to build a new pipeline to meet Turkey’s growing gas demand, which may include a special hub on the Turkish-Greek border for customers in southern Europe. For now, the supply of Russian gas to Turkey will be raised by 3 billion cubic meters via the already operating Blue Stream pipeline, he said. Last year, 13.7 bcm of gas were supplied to Turkeyvia Blue Stream, according to Reuters. Moscow will also reduce the gas price for Turkish customers by 6% from January 1, 2015, Putin said. “We are ready to further reduce gas prices along with the implementation of our joint large-scale projects,” he added.

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And announced a 0.8% growth shrinkage for 2015.

Russia Intervenes As Crumbling Ruble Echoes 1998 Debt Crisis (Guardian)

Russia’s central bank was forced to step in to defend the ruble on the foreign exchanges on Monday after fears over the economy’s vulnerability to a weak oil price sent the currency to a record low against the dollar. Moscow was forced to abandon its hands-off policy towards the ruble amid heavy selling, unmatched since the Russian debt default of 1998. The Russian central bank intervened when the ruble was down 6.5% on the day against the US dollar, and by the close of trading the currency had recouped more than half its earlier losses. A bounce in the oil price from a fresh five-year low and a sense that the sell-off since last week’s meeting of the Opec cartel has been overdone helped sentiment towards the Russian currency, which has been badly buffeted by a plunge of almost 40% in the cost of crude since the summer.

Data from the US suggesting that drilling activity in the shale oil sector is being affected by lower oil prices also helped the ruble by pushing down the value of the dollar. Oil is denominated in dollars, so when the US currency falls oil becomes cheaper and more attractive for holders of other currencies. With Moscow fearful that the drop in the value of the ruble makes Russia vulnerable to capital flight, Ksenia Yudaeva, the Russian central bank’s deputy chairwoman, told newswires that households should not panic. She said the rise in interest rates to 9.5% should encourage them not to convert savings into euros or dollars. “It’s necessary to explain to people that the yield they get on their deposits at the moment will guarantee a high degree of safety for their savings with regards to inflation. They should think twice before rushing out, losing the yield on their deposits, taking on currency risks and losing money on their currency conversions.”

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NATO is putting ever more attack weapons in countries it had been agreed would be neutral terrain.

Russia Says NATO Destabilizes North Europe, Aid Draws Ire (Bloomberg)

Russia accused NATO of trying to destabilize northern Europe as the alliance’s chief said the latest aid convoy for Ukraine was another sign of Russian disrespect for its neighbor’s border. NATO military drills and its transfer of warplanes capable of carrying nuclear weapons to the Baltic states are a “reality which is extremely negative,” Interfax reported Russian Deputy Foreign Minister Aleksey Meshkov as saying today. “They are trying to shake up the most stable region in the world, the north of Europe,” Meshkov said. “In this regard, Russia’s leadership is and will be taking all steps to ensure the security of Russia and its citizens.” Ukraine and its allies blame Russia for stoking the conflict in the east of Ukraine, which has killed more than 4,300 people and left at least 10,000 wounded. The government in Moscow denies involvement. After delivering more than 1,200 metric tons of cargo to the Donetsk and Luhansk regions without consulting the government in Kiev yesterday, Russia may soon dispatch a ninth aid convoy, Tass reported, citing the Emergencies Ministry.

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Stranger than fiction. Then again, if a country seen as hostile to the US produces a movie in which the plot evolves around a plan to kill the American President, how amused would Washington be?

North Korea Refuses To Deny Sony Pictures Cyber-Attack (BBC)

North Korea has refused to deny involvement in a cyber-attack on Sony Pictures that came ahead of the release of a film about leader Kim Jong-un. Sony is investigating after its computers were attacked and unreleased films made available on the internet. When asked if it was involved in the attack a spokesman for the North Korean government replied: “Wait and see.” In June, North Korea complained to the United Nations and the US over the comedy film The Interview. In the movie, Seth Rogen and James Franco play two reporters who are granted an audience with Kim Jong-un. The CIA then enlists the pair to assassinate him. North Korea described the film as an act of war and an “undisguised sponsoring of terrorism”, and called on the US and the UN to block it. California-based Sony Pictures’ computer system went down last week and hackers then published a number of as-yet un-released films on online download sites.

Among the titles is a remake of the classic film Annie, which is not due for release until 19 December. The Interview does not appear to have been leaked. When asked about the cyber-attack, a spokesman for North Korea’s UN mission said: “The hostile forces are relating everything to the DPRK (North Korea). I kindly advise you to just wait and see.” On Monday Sony Pictures said it had restored a number of important services that had to be shut down after the attack. It said it was working closely with law enforcement officials to investigate the matter but made no mention of North Korea. The FBI has confirmed that it is investigating. It has also warned other US businesses that unknown hackers have launched a cyberattack with destructive malware.

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It’s good to see the NZ justice system has a degree of independence. But this isn’t over. They’ll keep on trying.

Kim Dotcom Avoids Jail After Bail Hearing (NZ Herald)

Kim Dotcom has had bail conditions tightened, although the judge who did so said there was no evidence he had breached any of the court-ordered conditions. Dotcom now has to report twice a week, rather than once, and is banned from travelling on private aircraft or sea-going vessels. Dotcom lambasted the United States and the Crown lawyers acting for it outside court, saying both seized the opportunity to have his bail revoked after he split from his former gold-plated legal team. “The court has found I have no breached any of my bail conditions. I have been probably the most compliant, exemplary candidate of bail in NZ and I am surprised, even though I am going home right now, that my bail conditions have been tightened given my excellent bail compliance.

“I think this is another case of harassment and bullying by the United States government in concert with the New Zealand government. I think this whole application was only made because my lawyers decided to resign because of a lack of funds on my part because Hollywood has seized the new family assets that have been made after the raid. “The Crown and US government have used this opportunity at a weak moment to make up the bogus case for me having breached my bail conditions.” He accused the FBI of being deceitful bringing allegations he had tried to sell a Rolls Royce or been in contact with banned co-accused. He said the evidence showed – as he claimed was true in other branches of the case – that the US would not act with openness and honesty.

“I’m now going home to play with my kids.” Judge Nevin Dawson dismissed the arguments put by the US, saying there was “no proof” he had been in contact with former Megaupload staff who are free in Europe but also facing criminal copyright charges. He said he was not compelled by accusations Dotcom acted with a “lack of candour” by using a driver licence under the name Kim Schmitz in 2009 when stopped for dangerous driving. He said “it appears to be a legitimate use of the name Kim Schmitz”. Other claims also failed to find traction with Judge Dawson, who said he was tightening conditions to take account of the wealth Dotcom had accrued since his arrest and the approaching extradition trial, set for June.

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Dec 012014
 
 December 1, 2014  Posted by at 11:10 pm Finance Tagged with: , , , , , , ,  14 Responses »
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DPC Government Street, Mobile, Alabama 1906

Is the Plunge Protection Team really buying oil now? That would be so funny. Out of the blue, up almost 5%? Or was it the Chinese doing some heavy lifting stockpiling for their fading industrial base? Let’s get to business.

First, in the next episode of Kids Say The Darndest Things – oh wait, that was Cosby .. -, we have New York Fed head (rhymes with methhead) Bill Dudley. Dudley’s overall message is that the US economy is doing great, but it’s not actually doing great, and therefore a rate hike would be too early. Or something. Bloomberg has the prepared text of a speech he held today, and it’s hilarious. Look:

Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery

The sharp drop in oil prices will help boost consumer spending and underpin an economy that still requires patience before interest rates are increased, Federal Reserve Bank of New York President William C. Dudley said. “It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech today at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.” Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.”

How is this possible? ‘The sharp drop in oil prices will help boost consumer spending’? I don’t understand that: Dudley is talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?

Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance. Crude oil suffered its biggest drop in three years after OPEC signaled last week it will not reduce production. Lower energy costs “will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending,” Dudley said.

The drop will especially help lower-income households, who are more likely to spend and not save the extra real income, he said.

Extra income? Real extra income, as opposed to unreal? How silly are we planning to make it, sir? Never mind, the fun thing is that Dudley defeats his own point. By saying that lower-income households are more likely to spend and not save the ‘extra real income’, he also says that others won’t spend it, and that of course means that the net effect on consumer spending will be down, not up. He had another zinger, that the whole finance blogosphere will have a good laugh at:

[..] He also tried to disabuse investors of the notion that the Fed would, in times of sharp equity declines, ease monetary conditions, an idea known as the “Fed put.” “The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky,” Dudley said. That could cause investors to push equity markets higher, contributing to a bubble, he said. “Let me be clear, there is no Fed equity market put,” he said.

That’s in the category: ‘Read my lips’, ‘Mission Accomplished’ and ‘I did not have sex with that woman.’ I remain convinced that they’ll move rates up, and patsies like Dudley are being sent out to sow the seeds of confusion. Apart from that, this is just complete and bizarre nonsense. And that comes from someone with a very high post in the American financial world. At least a bit scary.

Another great one came also from Bloomberg today, when it reported that US holiday sales had missed by no less than 11%. Maybe Dudley should have put that in his speech?! This one turns the entire world upside down:

US Consumers Reduce Spending By 11% Over Thanksgiving Weekend

Even after doling out discounts on electronics and clothes, retailers struggled to entice shoppers to Black Friday sales events, putting pressure on the industry as it heads into the final weeks of the holiday season. Spending tumbled an estimated 11% over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up. Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure.

The NRF had predicted a 4.1% sales gain for November and December – the best performance since 2011. Still, the trade group cast the latest numbers in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts. “The holiday season and the weekend are a marathon, not a sprint,” NRF Chief Executive Officer Matthew Shay said on a conference call. “This is going to continue to be a very competitive season.” Consumer spending fell to $50.9 billion over the past four days, down from $57.4 billion in 2013, according to the NRF. It was the second year in a row that sales declined during the post-Thanksgiving Black Friday weekend, which had long been famous for long lines and frenzied crowds.

Shoppers are confident enough to not shop. And why do they not shop? Because the economy’s so strong. Or something. They were so confident that 6 million of them just stayed home. While those that did go out had the confidence to spend, I think, 6.4% less per capita. Maybe that confidence has something to do with at least having some dough left in our pocket.

On the – even – more serious side, two different reports on how much stocks in the US are overvalued. First John Hussman talking about his investment models, an where he did get it right:

Hard-Won Lessons and the Bird in the Hand

[..] the S&P 500 is more than double its historical valuation norms on reliable measures (with about 90% correlation with actual subsequent 10-year market returns), sentiment is lopsided, and we observe dispersion across market internals, along with widening credit spreads. These and similar considerations present a coherent pattern that has been informative in market cycles across a century of history – including the period since 2009. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.

I know exactly the conditions under which our approach has repeatedly been accurate in cycles across a century of history, and in three decades of real-time work in finance: I know what led me to encourage a leveraged-long position in the early 1990’s, and why were right about the 2000-2002 collapse, and why we were right to become constructive in 2003, and why we were right about yield-seeking behavior causing a housing bubble, and why we were right about the 2007-2009 collapse. And we know that the valuation methods that scream that the S&P 500 is priced at more than double reliable norms, and that warn of zero or negative S&P 500 total returns for the next 8-9 years, are the same valuation methods that indicated stocks as undervalued in 2008-2009.

As an important side note, the financial crisis was not resolved by quantitative easing or monetary heroics. Rather, the crisis ended – and in hindsight, ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned mark-to-market rules, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The decision by the FASB gave banks “significant judgment” in the values that they assigned to assets, which had the immediate effect of making banks solvent on paper despite being insolvent in fact.

Rather than requiring the restructuring of bad debt, policy makers decided to hide it behind an accounting veil, and to gradually make the banks whole by lowering their costs and punishing ordinary savers with zero interest rates, creating yet another massive speculative yield-seeking bubble in risky assets at the same time. [..]

This is 5.5 years ago. Do we still think about this enough? Do we still realize what the inevitable outcome will be? Hussman suggests the moment is near.

The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme. Based on valuation metrics that are about 90% correlated with actual subsequent returns across history, we estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years. At this point, the suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk.

As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad.

115% above reliable historical norms. That’s what the equity put that doesn’t exist, plus the Plunge Protection Team, have achieved. None of that stuff is worth anything near what you pay for it. But people do it anyway, and think very highly of themselves for doing it. Because it makes them money. And anything that makes you money makes you smart.

Then, the crew at Phoenix Capital, courtesy of Tyler Durden:

Stocks Have Been More Overvalued Only ONCE in the Last 100 Years (Phoenix)

Stocks today are overvalued by any reasonable valuation metric. If you look at the CAPE (cyclical adjusted price to earnings) the market is registers a reading of 27 (anything over 15 is overvalued). We’re now as overvalued as we were in 2007. The only times in history that the market has been more overvalued was during the 1929 bubble and the Tech bubble. Please note that both occasions were “bubbles” that were followed by massive collapses in stock prices.


Source: http://www.multpl.com/shiller-pe/

Then there is total stock market cap to GDP, a metric that Warren Buffett’s calls tge “single best measure” of stock market value. Today this metric stands at roughly 130%. It’s the highest reading since the DOTCOM bubble (which was 153%). Put another way, stocks are even more overvalued than they were in 2007 and have only been more overvalued during the Tech Bubble: the single biggest stock market bubble in 100 years.


Source: Advisorperspectives.com


1) Investor sentiment is back to super bullish autumn 2007 levels.
2) Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).
3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).
4) Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).
5) Margin debt (money borrowed to buy stocks) is near record highs.

In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.

If we combine Hussman and Phoenix, we see an enormous amount of people playing with fire. And their lives. And that of their families. All as ‘confident’ as those American shoppers are (were?) supposed to be. At least a whole bunch of those were smart enough not to show up. How smart will the investment world be? Their senses have been dulled by 6 years of low interest rates, handouts and other manipulations. They’re half asleep by now.

Nobody knows what anything is worth anymore, investors probably least of all. After all, their sentiment is back to ‘super bullish autumn 2007’ levels. And they listen to guys like Dudley, who don’t have their interests at heart. Everybody thinks they’ll outsmart the others, and the falling knife too. Me, I’m wondering how much y’all lost on oil stocks and bonds recently. And how much more you’re prepared to lose.

Oct 112014
 
 October 11, 2014  Posted by at 11:14 am Finance Tagged with: , , , , , , , ,  5 Responses »
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DPC Sinking last tubular section, Michigan Central R.R. tunnel, Detroit River 1910

More S&P 500 Pain Seen as 10% Losses Spread (Bloomberg)
Volatility Keeps Rising; VIX Hits New 52-Week High (Barron’s)
US Stocks Close Out Worst Week Since May 2012 (AP)
Wall Street Goes Short Bonds at Bad Time as Debt Rallies (Bloomberg)
Dam Breaks In Europe As Deflation Fears Wash Over ECB Rhetoric (AEP)
Dennis Gartman Says The Euro ‘Is Doomed To Failure’ (CNBC)
Why Oil Is Plunging: The “Secret Deal” Between The US And Saudi Arabia (ZH)
Here’s Why Shale Oil Stocks Are Tanking (CNBC)
ECB Weighing First Step to Buying Yuan for Foreign Reserves (Bloomberg)
Deutsche Bank Latest ‘Untouchable’ Target for Munich Prosecutor (Bloomberg)
S&P: Negative Outlook For France’s Risky Reform (CNBC)
S&P Downgrades Finland To AA+ from AAA (CNBC)
Six Years After Lehman, US And UK Play Financial Crisis War Game (Guardian)
30-Year Mortgages Back Below 4%, But For How Long? (MarketWatch)
Ebola Screening at JFK Focusing on a Few Among Masses (Bloomberg)
China Pollution Levels Hit 20 Times Safe Limit (Guardian)

Some still see a very long bull market dead.

More S&P 500 Pain Seen as 10% Losses Spread (Bloomberg)

For most American stocks, the correction has arrived. While gauges such as the Standard & Poor’s 500 cling to gains for the year, declines that exceed the 10% are spreading in the broader market. In the Russell 3000 Index (RAY), for example, 79% of companies are down that much from their highs, according to data compiled by Bloomberg. That’s a bad sign to Doug Ramsey, the chief investment officer of Leuthold Group who correctly predicted in July 2013 that the U.S. bull market had months more to go. He said that when losses multiply in stocks away from benchmark indexes, it usually means the bigger companies are next. “We’re not expecting a bear market, but we are expecting a significant additional correction,” Ramsey, who helps oversee $1.7 billion at Minneapolis-based Leuthold, said by phone. “We’re seeing very classic late-cycle action where the Dow and S&P 500 are painting a very false picture of what’s going on underneath.”

Concern the rate of global growth is slowing and the Federal Reserve is preparing to raise interest rates has pushed the S&P 500 down 5.2% from its September record. The 1,700-stock Value Line Arithmetic index, which strips out weightings related to market value to show how the average U.S. stock has fared, is down 10% since July. An average of 7.9 billion shares a day changed hands on U.S. exchanges this week, the most since November 2011, as the Dow Jones Industrial Average erased its 2014 gain. The Chicago Board Options Exchange Volatility Index jumped 46% to 21.24, the highest since February. Three weeks of declines have broken the almost unprecedented calm that had enveloped markets for most of 2014. Eight trading days into October, the S&P 500 has posted six single-day moves exceeding 1%. The market went without any swings of that size for 62 days in May, June and July, the longest stretch since 1995.

Read more …

Markets need volatility simply to make money.

Volatility Keeps Rising; VIX Hits New 52-Week High (Barron’s)

Fear is rising. The CBOE Volatility Index (VIX) continued its upward climb today, rising 9% to 20.45 after earlier rising above 22 on the heels of eye-popping gains yesterday. UBS Strategist Julian Emanuel argues that volatility could keep rising. In a note published today, he wrote:

When considering the numerous geopolitical hot spots, public health concerns, the end of the Fed’s QE due on 10/29 and the unknown of elections in Brazil and Ukraine (10/26) and the US Midterm election on 11/4, we expect volatility to remain elevated, gravitating toward the long term mean of 20, with the potential to spike higher should 20142 s growth scare more closely resemble 20112 s (S&P 500 decline of 17.9%) rather than 20132 s (S&P 500 decline of 5.8%). Putting it into context, a VIX of 20 implies an average daily move in the S&P 500 of around 24 points and in the Dow Jones Industrial Average, 210 points. Expect more volatility!


The VIX, known as Wall Street’s fear gauge, has been rising since mid-June, when it fell below the 11 mark, the lowest levels since 2007. The index is inversely correlated with the S&P 500 and many view it as an indicator of market peaks. Today’s intraday high of 22.06 is also a 52-week high for the index. The bulls and bears are battling valiantly. Yesterday, the grizzlies won, with the Dow suffering a more than 300-point drop and continuing to fall today.

Read more …

More to come.

US Stocks Close Out Worst Week Since May 2012 (AP)

U.S. stocks are closing out a turbulent week with another loss, giving the market its worst week since May 2012. Technology shares were especially hard hit. Semiconductor makers slumped after Microchip Technology cut its sales forecast for the quarter and warned investors to expect bad news from others in the sector. The Dow Jones industrial average lost 115 points, or 0.7%, to 16,544 Friday. The Standard and Poor’s 500 fell 22 points, or 1.2%, to 1,906. The technology-heavy Nasdaq fell 102 points, or 2.3%, to 4,276. The stock market has been swinging sharply this week. The Dow had its biggest decline of the year Thursday, a day after its biggest gain. Bond prices rose. The yield on the 10-year Treasury note fell to 2.29%.

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That sounds terrible unwise.

Wall Street Goes Short Bonds at Bad Time as Debt Rallies (Bloomberg)

It’s been a painful week for Wall Street’s biggest bond brokers. Primary dealers had the biggest short position on benchmark government notes at the beginning of the month since last year’s taper tantrum. It was the wrong bet: The debt has gained 1.5% in October as 10-year Treasury yields plunged to the lowest since June 2013. The surprise rally has even the most experienced bond traders struggling to figure out how to maneuver in this market. On one hand, the Federal Reserve is slowing its unprecedented stimulus, suggesting that yields are poised to rise. On the other, central banks elsewhere across the globe are accelerating their easy-money policies to suppress borrowing costs and avoid deflation.

“Over the last year, what’s sort of been the market’s focus is everyone is bearish,” preparing for rates to rise, said David Ader, head of interest-rate strategy at CRT Capital Group LLC. Given banks’ unwillingness to take on risk in the face of new regulations, even a modest short position on a historical basis shows a meaningful bet, he said. The 22 primary dealers that trade with the U.S. central bank had a net $20.7 billion wager against notes maturing in the seven-to-eleven year range during the week ended Oct. 1, Fed data show. That’s the biggest short position on the notes since June 2013. It makes sense that Wall Street would bet against benchmark bonds given economists predict that 10-year Treasury yields will rise to 2.71% by year-end from 2.3% now, according to a Bloomberg survey. Of course, instead of rising this year, yields have fallen from 3% on Dec. 31.

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The Keynes camp knows the solution, as always. Always the same solution too.

Dam Breaks In Europe As Deflation Fears Wash Over ECB Rhetoric (AEP)

A key gauge of deflation risk in Europe is flashing red, dropping to record lows on fears of fresh recession and lack of decisive action by the European Central Bank. The sudden lurch downwards came as Bank of America warned that France’s debt ratio could rocket to 120pc of GDP within five years, unless the EU authorities take radical steps to reflate the region’s economy. Italy’s debt could threaten 150pc even earlier. The 5-year/5-year forward swap rate monitored closely by traders plummeted beneath 1.77pc on Friday morning as a global growth scare drove European stock markets to a 12-month low. “This rate is the most important market signal on the planet right now. Everybody is watching the chart, and it has just gone off a cliff,” said Andrew Roberts, credit chief at RBS. Bond markets echoed the refrain, with yields on 10-year German Bunds falling to an all-time low of 0.88pc on flight to safety, though the bond rally can also be seen as a bet by traders that the ECB will soon be forced to launch full-blown quantitative easing.

Mario Draghi, the ECB’s president, has adopted the 5Y/5Y rate as the bank’s policy lodestar, used to distill expectations of future inflation. Any fall below 2pc is deemed a risk that expectations are becoming “unhinged” and could lead to a Japanese-style deflation trap. Mr Roberts said the ECB’s plan for asset purchases – or “QE-lite” – does not yet add up to a coherent strategy. “We don’t think they can boost their balance sheet by more than €165bn over the next two years by buying asset-backed securities (ABS) and covered bonds together, given the haircut effects. The sums are trivial,” he said. RBS estimates that the inflation rate has already dropped to below 0.1pc in the eurozone if one-off tax rises and fees are stripped out, and this measure may turn negative in October. “Deflation is already knocking on the door. We think it could happen as soon as next month given the latest fall in food prices,” said Mr Roberts. “We are reaching the end game in Europe. If they don’t launch real QE and start reflation by the end of the year or soon after, the consequences are too awful to contemplate,” he said.

Read more …

Gartman’s right. Question is how much damage it can still do before it’s over.

Dennis Gartman Says The Euro ‘Is Doomed To Failure’ (CNBC)

Conflicting economic priorities in Europe likely will spell the end for the region’s common currency, widely followed investor Dennis Gartman said. The author of The Gartman Letter attributes much of the global market tumult this week to weakness in the European Union, and specifically remarks Thursday from European Central Bank President Mario Draghi. Speaking in Washington, Draghi, who famously promised two years ago to do “whatever it takes” to keep the EU together, emphasized that central banks can’t by themselves save the world and need cooperation from fiscal policy. It’s hardly the first time that message has been sent—former Federal Reserve Chairman Ben Bernanke often pleaded with Washington for fiscal policy coordination—but Gartman, writing in his daily missive, said global markets needed to hear more:

As the world awaited a hoped-for clear and precise statement that the ECB was prepared to actually take action on monetary policy and become expansionary, it instead heard a lecture explaining that he and the others on the ECB’s monetary policy committee had done all that they could do to try to strengthen the economy there and that the real battle had to be waged by the political authorities to reform the sclerotic nature of the economies there.

The result, he said, is a bifurcated Europe. On one side there are the “GAFs,” or Germany, Austria and Finland, who oppose U.S.-style quantitative easing, or asset purchases aimed at goosing financial markets. On the other side are the “FIGs,” or France, Italy and Greece, whose economies are struggling and need liquidity measures. So far, he said, the GAFs have won, and this is what is roiling markets that have come to depend on central bank largess since the financial crisis.

The (euro), we fear, is doomed to failure at this point. The political anger that has been evidenced in the battles over (European Commission president-elect) Mr. (Jean-Claude) Juncker’s proposed Cabinet … shall erupt in full flower in the days ahead. The FIG countries cannot abide further austerity; austerity in the face of 20+% unemployment is economic nonsense. On the other hand the GAFs, with sub 6% unemployment, really don’t need an expansionary monetary policy, can abide fiscal conservatism and will fight for both.

Read more …

This is what I’ve mentioned a few times already: using the price of oil to get at Russia. However, there’s much more to it than just changing Putin’s position on Syria, as the article claims. The US wants to break Putin, period, and gain control over Russian resources. Still, messing with Syria is messing with Russia’s only Middle East link, which is just too dangerous for Putin, and therefore a very risky approach. The Saudis may be overestimating their own savvy. Or they may just be getting very desperate.

Why Oil Is Plunging: The “Secret Deal” Between The US And Saudi Arabia (ZH)

Two weeks ago, we revealed one part of the “Secret Deal” between the US and Saudi Arabia: namely what the US ‘brought to the table’ as part of its grand alliance strategy in the middle east, which proudly revealed Saudi Arabia to be “aligned” with the US against ISIS, when in reality John Kerry was merely doing Saudi Arabia’s will when the WSJ reported that “the process gave the Saudis leverage to extract a fresh U.S. commitment to beef up training for rebels fighting Mr. Assad, whose demise the Saudis still see as a top priority.”

What was not clear is what was the other part: what did the Saudis bring to the table, or said otherwise, how exactly it was that Saudi Arabia would compensate the US for bombing the Assad infrastructure until the hated Syrian leader was toppled, creating a power vacuum in his wake that would allow Syria, Qatar, Jordan and/or Turkey to divide the spoils of war as they saw fit. A glimpse of the answer was provided earlier in the article “The Oil Weapon: A New Way To Wage War“, because at the end of the day it is always about oil, and leverage. The full answer comes courtesy of Anadolu Agency, which explains not only the big picture involving Saudi Arabia and its biggest asset, oil, but also the latest fracturing of OPEC at the behest of Saudi Arabia…

… which however is merely using “the oil weapon” to target the old slash new Cold War foe #1: Vladimir Putin. To wit:

Saudi Arabia to pressure Russia, Iran with price of oil

Saudi Arabia will force the price of oil down, in an effort to put political pressure on Iran and Russia, according to the President of Saudi Arabia Oil Policies and Strategic Expectations Center. Saudi Arabia plans to sell oil cheap for political reasons, one analyst says.  To pressure Iran to limit its nuclear program, and to change Russia’s position on Syria, Riyadh will sell oil below the average spot price at $50 to $60 per barrel in the Asian markets and North America, says Rashid Abanmy, President of the Riyadh-based Saudi Arabia Oil Policies and Strategic Expectations Center. The marked decrease in the price of oil in the last three months, to $92 from $115 per barrel, was caused by Saudi Arabia, according to Abanmy. 

With oil demand declining, the ostensible reason for the price drop is to attract new clients, Abanmy said, but the real reason is political. Saudi Arabia wants to get Iran to limit its nuclear energy expansion, and to make Russia change its position of support for the Assad Regime in Syria. Both countries depend heavily on petroleum exports for revenue, and a lower oil price means less money coming in, Abanmy pointed out. The Gulf states will be less affected by the price drop, he added. The Organization of the Petroleum Exporting Countries, which is the technical arbiter of the price of oil for Saudi Arabia and the 11 other countries that make up the group, won’t be able to affect Saudi Arabia’s decision, Abanmy maintained. The organization’s decisions are only recommendations and are not binding for the member oil producing countries, he explained.

Today’s Brent closing price: $90. Russia’s oil price budget for the period 2015-2017? $100. Which means much more “forced Brent liquidation” is in the cards in the coming weeks as America’s suddenly once again very strategic ally, Saudi Arabia, does everything in its power to break Putin.

Read more …

Because they’re worthless?

Here’s Why Shale Oil Stocks Are Tanking (CNBC)

Why are shale plays getting hit so hard? The short answer is, because oil is dropping. West Texas Intermediate has gone from $105 to $85 in three months. But a large part of the problem has to do with the way shale drilling is financed. Let’s say you own a shale company and you want to finance drilling a well in, say, the Bakken. You need $10 million (I am just using $10 million as an example). You have a demonstrated reserve value from the well of, say, $20 million. Here’s how you might finance the $10 million deal. First, get a line of credit from a bank based on the value of the reserves. In turn, the lender becomes a secured creditor. Let’s say that based on a value of $20 million, a secured lender is willing to put up $5 million. You can fund another $2 million from your own cash flow. Now you have $7 million. For the remaining $3 million, you go to the high-yield debt market, which of course is an unsecured creditor. Here’s what the deal looks like:

Secured creditor: $5 million
Cash flow: $2 million
Unsecured creditor: $3 million (high yield)
Total: $10 million

This is simplified, but you get the point. Now, let’s look at what happens when oil starts to drop fast, which is exactly our scenario. That secured creditor with the line of credit? He’s getting nervous, because now instead of reserves worth $20 million for your project, those reserves are now worth only, say, $16 million. That’s a problem. The line of credit you will be able to get will drop because as the price of oil drops banks don’t want to lend as much So, instead of $5 million, your secured creditor will only lend $4 million, and at a higher rate. Now you need $6 million more. Another problem: because the price of oil is down, you can’t contribute as much from your cash flow, so instead of $2 million that you contribute, you can only contribute $1 million. That’s $5 million total. You still need another $5 million, and now you have to go to the high-yield market. Except the high-yield market is aware of your problems, and they want a higher interest rate too. So here’s what this new deal looks like:

Secured creditor: $4 million
Cash flow: $1 million
Unsecured creditor: $5 million
Total: $10 million

This is a problem, because you are: 1) making less money from selling oil, and 2) shelling out a lot more money in interest to your creditors. As oil drops, you now run an increased risk of cash flow problems, and there is default risk in the debt. So you are making less money, and your one cheap source of financing (the line of credit) is shrinking, forcing you to go to high yield. You are in a debt spiral. Get it? So, at what point does all this start to get problematic? That’s not easy to answer, because every company is different. There are different yields from different wells, and some have more gas than oil. But there’s no doubt that things get a bit difficult for some producers when oil is in the low $80’s, which is where it is heading now. And rather than differentiate between companies…which is what analysts are paid to do…there is a lot of indiscriminate selling. Oil vs. gas, doesn’t matter. Sell and ask questions later.

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Could be a big booost for the yuan. Ironically, that’s the last thing China needs.

ECB Weighing First Step to Buying Yuan for Foreign Reserves (Bloomberg)

The European Central Bank will discuss next week whether to begin laying the groundwork to add the Chinese yuan to its foreign-currency reserves, according to two people with knowledge of the matter. Governing Council members gathering in Frankfurt for their Oct. 15 mid-month meeting will consider the move, said the people, who asked not to be named because the discussions aren’t public. Should officials eventually decide to buy the currency, initial purchases would be small and might start in a year at the earliest, one of them said Such a measure by the ECB would mark a major step in the internationalization of China’s currency, also known as the renminbi. While China is the world’s second-largest national economy, the yuan isn’t ranked among the most-held foreign reserve assets, according to data from the International Monetary Fund. The U.S. dollar leads at 61% of holdings. The agenda of the Governing Council is confidential, an ECB spokesman said, declining to comment further on the matter.

Speaking in Washington yesterday, former Bundesbank President Axel Weber predicted a greater international role for the yuan. “The emergence of the renminbi will be a big factor,” he said. “You will have an appreciation of the renminbi.” The ECB’s push comes against a backdrop of global central bank diplomacy to ease the way for China’s currency, after a series of swap agreements on emergency liquidity. Officials will review the IMF’s basket of so-called Special Drawing Rights, which doesn’t currently include the yuan, by 2015, according to the fund’s web site. China hopes its currency can join, Li Bo, head of the People’s Bank of China’s second monetary policy department, said in Hong Kong in March. The basket currently includes the dollar, euro, pound and yen.

Read more …

If the Americans won’t do it, German prosecutors are welcome to take over where they can.

Deutsche Bank Latest ‘Untouchable’ Target for Munich Prosecutor (Bloomberg)

Manfred Noetzel has a message for Deutsche Bank: Don’t mess with Bavarian justice. A day after his Munich Prosecutors Office sealed a $100 million settlement with Formula One’s Bernie Ecclestone in August, Noetzel’s team slapped criminal charges on five current and former executives at Germany’s largest bank. Noetzel, 64, is taking his fight on crime to the heart of the country’s financial industry as he reaches the pinnacle of a career that spans more than three decades and blazes a trail through the boardrooms of companies from Siemens to MAN and now Deutsche Bank. “Today, there’s no company that could say: ‘We’re untouchable, no one can get us,’” Noetzel, chief of the Munich Prosecutors Office, said in an interview. “Those times are over.”

The bank officials, including Co-Chief Executive Officer Juergen Fitschen and former CEOs Josef Ackermann and Rolf Breuer, were charged with attempted fraud for allegedly misleading a Munich appeals court in a lawsuit by the late media magnate Leo Kirch. His office has been investigating the Deutsche Bank cases since 2011 when the Munich appeals court said at a hearing that Ackermann, Breuer and two other managers lied to judges hearing a €2 billion ($2.5 billion) dispute between the lender and Kirch, who passed away in 2011. “To have yourself taken for a ride by deliberately wrong statements, aimed at subverting a clearly justified civil claim – no one puts up with that,” Noetzel said. “Neither does the Bavarian judiciary.

The integrity and impartiality of the administration of justice must be protected.” Deutsche Bank’s resolution of the more than 10-year-old civil dispute with Kirch’s heirs didn’t dissuade Noetzel from pursuing the case that may likely be the major one in the last year of his career in public service. The Frankfurt-based lender in February paid €925 million to the heirs of Kirch to end the litigation over the collapse of his media empire. Instead, a month later prosecutors added in-house lawyers and outside attorneys to the list of suspects, searched the bank for a third time and raided the offices of law firms that worked on the case. “The whole case is a declaration of war against Deutsche Bank,” said Martin Buecher, a defense lawyer in Cologne, who isn’t involved in the matter. “It’s also a demonstration of power.”

Read more …

Think maybe earlier experiences scared S&P away from expressing too harsh judgments on France?

S&P: Negative Outlook For France’s Risky Reform (CNBC)

Ratings agency S&P cut its outlook for France to negative from stable on Friday, amid growing concerns about the strength of the country’s economic recovery. Still, S&P affirmed France’s AA/A-1+ rating. France has been dubbed the “sick man” of the euro zone over recent months, after economic data which have continued to surprise on the downside. GDP failed to expand during the second quarter of this year after stalling in the first, and is expected to have grown only slightly—by 0.2%—in the third quarter, according to the Bank of France. “In our view, the French government’s budgetary position is deteriorating in light of France’s constrained nominal and real economic growth prospects,” S&P wrote in its research update on the country released Friday. S&P last downgraded France in November 2013, when it cut its sovereign credit rating to AA. Last month, rival credit agency Moody’s said it was keeping its Aa1 rating (the agency’s second highest) on French government debt, but maintained its negative outlook.

S&P pointed to France’s high per capita income and skilled workforce in explaining the affirmation of an AA rating. But the outlook revision “reflects our view of receding fiscal space for the French government in light of the economy’s constrained real and nominal growth prospects against the background of policy implementation risk,” S&P wrote. France’s finance minister, Michel Sapin, told CNBC as the S&P announcement came out that the change of outlook does not represent an issue with France, but is actually about the euro zone. “Of course it is about France,” Moritz Kraemer, who heads sovereign ratings for S&P, told CNBC in response to Sapin’s comments. “We indeed think that the risks are increasingly tilted towards the downside, which has to do with a number of things. Some of them are home-made, others of them are indeed sort of a pan-European phenomenon.” Kraemer said S&P is “now quite doubtful” that France can hit its 3% 2017 deficit target.

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With Germany on the cusp of recession, nothing in Europe is sacred anymore.

S&P Downgrades Finland To AA+ from AAA (CNBC)

Standard & Poor’s downgraded Finland’s sovereign debt rating to AA+ from AAA on Friday, citing economic weak development. It also revised the country’s outlook to “stable” from “negative.” The ratings agency said Finland could experience “protracted stagnation” due to its aging population, shrinking workforce and weakening external demand. In addition, S&P cited the country’s dwindling market share in the global IT industry and its relatively rigid labor market as contributing factors. Finland, which has an economy of about $256 billion, has struggled to consolidate its public finances and reduce public debt, the agency said. It expects the country’s deficit to widen to 2.7% of its gross domestic product in 2014.

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Fully confident they’ll get it right this time.

Six Years After Lehman, US And UK Play Financial Crisis War Game (Guardian)

The top financial brass from the Treasuries and central banks of Britain and the US are to take part in a war game, behind closed doors in Washington on Monday, to test how they would handle another Lehman Brothers-style banking crisis. Six years after the financial earthquake that led to the multibillion-pound taxpayer bailouts of Royal Bank of Scotland and Lloyds Banking Group, the most senior policymakers from both sides of the Atlantic will try to find out whether they are now any better prepared for the collapse of a bank deemed too big to fail. The chancellor, George Osborne, and Mark Carney, the governor of the Bank of England, will stay on at the end of the annual meetings of the International Monetary Fund and World Bank to head the UK team in the exercise, which is to be held at the offices of the Federal Deposit Insurance Commission – the organisation that guarantees US bank deposits.

They will be joined by 11 others, including the chairman of the Federal Reserve, Janet Yellen, the US treasury secretary, Jack Lew, and regulators from Britain and America, for a test of how the authorities would respond to two possible scenarios – the collapse of an American bank with UK operations and the failure of a British bank with operations in the US. Although the war game will not be based on any specific institution, UK banks with operations in the US include Barclays and HSBC, while US investment banks such as Goldman Sachs and Bank of America have a big presence in the City. Osborne said it was the first time a war game had been conducted at such a senior level. “We will work through how we would respond to the failure of a cross-border firm. We are going to make sure we could handle an institution previously regarded as too big to fail,” he said.

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Still sucking in the dupes.

30-Year Mortgages Back Below 4%, But For How Long? (MarketWatch)

Borrowers who thought they’d seen the last of 30-year fixed mortgages with interest rates below 4% got a pleasant surprise this week, as stock market selloffs, fears of another world-wide economic slowdown, and perhaps an Ebola scare helped drive down mortgage rates to their lowest levels in more than a year. Interest rates on the 10-year Treasury note have fallen to 2.55%, down from 2.61% a week ago, leading to some 30-year fixed mortgages dipping below 3.99% for the first time since June 2013, according to Bankrate.com. “We have seen a flurry of activity in the last 24 to 48 hours,” said Mark Livingstone, a mortgage broker at Cornerstone First Financial in Washington, D.C., who said the sharp fall in Treasurys has potential borrowers heading back into the market. “Everything has come down and we’re expecting it to come down a little bit more,” he said.

The drop in interest rates has corresponded with an increase in mortgage loan application volume, the Mortgage Bankers Association said Oct. 8, with its Market Composite Index increasing 3.8% for the week ending Oct. 3, from a week earlier. MBA’s Refinance Index rose 5% from the previous week. It was the first increase in three weeks, MBA said. The average contract rate for a conforming loan ($417,000 or less) on a 30-year fixed mortgage for the week ending Oct. 3 was 4.3%, down from 4.33% a week earlier, MBA said. For contracts greater than $417,000, or most jumbo loans, the rate decreased to 4.21% for the week ending Oct. 3, down from 4.28% a week earlier, MBA said. FHA loans through Oct. 3 dropped to 4%, down from 4.07% a week earlier. The MBA’s survey covers about three-quarters of all U.S. retail residential mortgage applications. A “parade of horribles” has driven down Treasury yields amid an equity market selloff, says Mike Fratantoni, chief economist with the Mortgage Bankers Association. “It’s a very strong flight to quality,” he said.

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A little cold? You can now be quarantined.

Ebola Screening at JFK Focusing on a Few Among Masses (Bloomberg)

John F. Kennedy International Airport begins added screening for arriving passengers today to help stem the spread of Ebola, the virus that’s killed more than 4,000 people this year in three African nations. While all international passengers will be sent through Customs and Border Protection’s primary inspection booth at the New York airport, inspectors will use special procedures for people listed on airlines’ manifests as having traveled from Liberia, Sierra Leone or Guinea. Anyone showing symptoms of the disease will be sent immediately to a Centers for Disease Control quarantine center inside the airport, Steve Sapp, a Customs spokesman, said in an e-mail. Others from the at-risk regions will be sent for a secondary examination to take their temperature, complete a health questionnaire and provide contact information. Travelers will be given health pamphlets with information on Ebola symptoms and contacts for medical professionals, according to a fact sheet from the CDC and Department of Homeland Security.

Anyone with a temperature over 101.5 degrees Fahrenheit (38.6 degrees Celsius) will be taken to the quarantine center, Sapp said. “Our hope is that the screening will improve vigilance and increase awareness about the Ebola disease for those individuals traveling from the affected areas,” said Jason McDonald, a CDC spokesman. Of the 275,000 daily airport customers, about 150 – or less than 0.1%- come to the U.S. from at-risk regions in Africa. About half the people who came to the U.S. from those three countries in the 12 months ending July 2014 arrived through JFK, according to Thomas Frieden, director of the CDC. 94% of passengers from the affected region to the U.S. fly through Kennedy and Washington Dulles, Newark Liberty, Chicago O’Hare and Atlanta Hartsfield airports. Those other four airports will get the enhanced entry screenings next week.

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China is so polluted we don’t know the half of it.

China Pollution Levels Hit 20 Times Safe Limit (Guardian)

Days of heavy smog shrouding swathes of northern China pushed pollution to more than 20 times safe levels on Friday, despite government promises to tackle environmental blight. Visibility dropped dramatically as measures of small pollutant particles known as PM2.5, which can embed themselves deep in the lungs, reached more than 500 micrograms per cubic metre in parts of Hebei, a province bordering Beijing. The World Health Organization’s guideline for maximum healthy exposure is 25. In the capital, buildings were obscured by a thick haze, with PM2.5 levels in the city staying above 300 micrograms per cubic metre since Wednesday afternoon and authorities issuing an “orange” alert. “It’s very worrying, the main worry is my health,” said a 28-year-old marketing worker surnamed Hu, carrying an anti-smog mask decorated with a pink pig’s nose as she walked in central Beijing. China has for years been hit by heavy air pollution, caused by enormous use of coal to generate electricity to power a booming economy, and more vehicles on the roads.

But public discontent about the environment has grown, leading the government to declare a “war on pollution” and vow to cut coal use in some areas. Nonetheless poor air quality has persisted with officials continuing to focus on economic growth, and lax enforcement of environmental regulations remains rife. In a sign of growing environmental activism, Greenpeace East Asia projected the message “Blue Sky Now!” on to a facade of the Drum Tower, a historic building north of the Forbidden City. The pollution – which also hit areas hundreds of kilometres from Beijing – comes as the city hosts a high-profile cycling tournament, the Tour of Beijing, and a Brazil-Argentina football friendly. Global heads of state from the US, Russia and Asia are set to gather in the capital for a key summit next month. City authorities said Thursday that they would place tighter restrictions on vehicle use during the APEC Economic Leaders’ Meeting in November, while requesting neighbouring areas to shut down polluting facilities.

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