Dec 122017
 
 December 12, 2017  Posted by at 3:03 pm Finance Tagged with: , , , , , , , , ,  1 Response »
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Gustave Courbet Seascape 1874

 

 

Bitcoin Doesn’t Exist was written exclusively for the Automatic Earth by Dr. D and first published as a five-part series there. The Full Story combines these five parts. Given the length and the amount of information, we suggest you might want to save or bookmark it. And you can of course always express your appreciation of the Automatic Earth through Paypal.

 

 

Dr. D: Bitcoin is all the rage today, and as it crosses over $10,000, a 10-bagger for the year, we should look at what it is, what it isn’t, and why it’s become so popular. Note my observations are those of a layman – which may be more useful than those of a programmer – but also those of a skeptic, which I’ll get to at the end.

First, what is Bitcoin? Well, the idea of digital money goes back to the first digits, financial mainframes. In fact, the “money” in use today throughout the financial system have long been no more than virtual 1’s and 0’s on a spinning hard drive somewhere, but the idea of Bitcoin-money, private-money, goes back further still. I mean, what is “money”? At its core, it’s no more than the most-tradable good in a given society, a trading chit we use as a measurement tool, a token recording how much value we created or are owed. Arguably the first money was not gold, not seashells or even barter, but a promise. Let me borrow your net and I’ll give you a couple fish from the work. Why? Because you might break the net or I might use it, so I need to get paid for my risk, reward for my effort in making and storing the net to begin with.

So money at its most austere is simply a promise. But a promise to whom for what? And that’s the problem. No matter what good you use, people place differing values on it, different time-preferences, and most especially ways to cheat, game the system, and renege. This is bad among businesses, banks – who are after all only men – especially bad among governments, but worst of all among government and banks combined. Because, should the banks lie, renege, default, abuse their privilege, who then would hold them to task?

In the past, over and over, groups have created their own “money”. The whole 19th century was marked by general stores extending credit, bank notes issued by thousands of private banks, each with their own strength and solvency and geography and discounted accordingly. In the 20th century, with central banks controlling money, many cities issued local “scrip” – promises to pay – in Detroit in the Depression, or California in the budget crunch of 2009, or “Ithaca Dollars” in NY as a sort of ongoing Ivy League experiment. But the problem with these only highlight the problems with money generally:who can issue them? Everyone? A central authority? Can they deliver goods? And what can they buy, not just in value but in location?

Ithaca Dollars or California Tax Vouchers are not much good to buy oil from Texas or tea from China. People will always prefer a good that is accepted everywhere, with no decay and no discount, because ultimately the money flows away, offshore or to central taxation, which makes local currencies ever-less valuable. But even if successful it leads to a new set of problems: if Detroit or Ithaca Dollars were in high demand, there would be ever-stronger incentive to counterfeit, cheat, and double-spend them. Thus from the Renaissance to now we used reputable banks backed by force of governments, through the Gold standard and the Fiat age until today.

Enter the hackers.

It’s not that these problems are unknown, or haven’t been approached or attempted before. Every generation, when they find the banks + government take a percentage for their costs to insure the system, thinks how can we do away with these guys, who both take too much and end up in an unapproachable seat of power? I mean, aren’t we supposed to be a Democracy? How can we have a fair society if the Iron Bank is both backing all governments at once, on both sides of a war? What good is it to work if compounding interest invariably leads to their winning Boardwalk and Park Place 100% of the time? But despite several digital attempts – some immediately shut down by government – no one had a solution until Satoshi Nakamoto.

We don’t know who Satoshi Nakamoto is, but since several of the well-meaning developers were immediately jailed for even attempting private money on reasons arguably groundless, we can suppose he had good incentive to remain anonymous. And speculation aside, it doesn’t matter: Satoshi’s addition was not “Bitcoin” per se, but simply an idea that made private currency possible. The domain Bitcoin.org was registered in 2008, showing intent, and the open-source code was promoted to a small cryptography group in January 2009. But what was it? What did it solve?

Double-spending. Basically, the problem of money comes down to trust. Trust between individuals, between the system, but also partly trust in non-interference of governments or other powerful groups. Bitcoin is a trust machine.

How does it work? Well, the basic problem of cheating was one of not creating fake, hidden registers of value, as the U.S. Government, J.P. Morgan, and the Comex do every day. If they asked Yellen to type some extra zeros on the U.S. ledger, print a few pallets of $100 bills to send to Ukraine, who would know? Who could stop them? So with Bitcoin, the “value”, the register is created by essentially solving a math problem, akin to discovering prime numbers. Why do something so pointless? Simple: math doesn’t lie. Unlike U.S. Dollars, there are only so many prime numbers. We can be certain you won’t reach 11-digits and discover an unexpected trove of a thousand primes in the row. Can’t happen. However useless, Math is certainty. In this case, math is also limited. It’s also known and provable, unlike the U.S. budget or Federal Reserve accounting.

The second problem of cheating was someone simply claiming chits they did not own. This was solved by having the participants talk back and forth with each other, creating a public record or ledger. In fact, Bitcoin is nothing more than a very, very long accounting ledger of where every coin came from, and how every coin has moved since then, something computers do very well. These accounting lines register amongst all participants using a process of confirmed consensus.

Double-spending is when someone writes a check either against money they don’t have (yet) and round-robin in the money for the one second of clearing, or else write a check against money they DO have, but then cancel the check before it clears, walking away with the goods. In a standard commerce, the bank backfills fraud and loss and the government arrests, tries, and imprisons people, but it’s no small cost to do so. Although there is still a small possibility of double-spending, Satoshi’s plan effectively closed the issue: the ledger is either written, or unwritten. There is no time in the middle to exploit.

 

Great for him, but if I buy coins by Satoshi and the original cryptogroup, won’t I just be transferring all my value to make them rich? Although Bitcoin supply may be limited by mathematics, this is the issuer problem. It is solved because as a free, open source code, everyone has an equal opportunity to solve the next calculation. Bitcoin starts with the original 50 coins mined in 2009, so yes, early adopters get more: but they took more risk and trouble back when it was a novelty valuable only as proof-of-concept. The original cash transaction was between hackers to buy two pizzas for 10,000 BTC ($98M today). Why shouldn’t they get preference? At the same time, we are not buying all 20 Million eventual coins from Satoshi and his close friends, which is arguably the case with the Federal Reserve and other central banks. Bitcoin is bought and created from equal participants who have been actively mining as the coins appear, that is, from doing electronic work.

This leads to the next challenge: why would anyone bother keeping their computers on to process this increasingly long accounting ledger? Electricity isn’t free. The process of “mining” is the recording of Bitcoin transactions. The discovery of coins therefore effectively pays for the time and trouble of participating in a public accounting experiment. Even should that stop, the act of using Bitcoin itself cannot be accomplished without turning on a node and adding lines to process the ledger. So we can reasonably expect that people will keep Bitcoin software “on” to help us all get Bitcoin work done. That’s why it’s a group project: public domain shareware.

What if they shut it down? What if it’s hacked? This leads to the next problem: resiliency. You have to go back a step and understand what Bitcoin is: a ledger. Anyone can store one, and in fact participants MUST store one. If Bitcoin were “shut off” as it were, it would be stored with each and every miner until they turned their computers back on. If it’s “off” there’s no problem, because no one transferred any Bitcoin. If it’s “on” then people somewhere are recording transactions. Think of it like a bowling group keeping a yearly prize of the ugliest shirt. Is there an actual shirt? No, the shirt is not the prize. Is there a gold trophy? No, “prize” is simply the knowledge of who won it. There is no “there”, no physical object at all. Strangely, that’s why it works.

 

This is important for the next problem: intervention. Many private monies have been attempted, notably e-gold within Bitcoin’s own origin. But the problem was, if there was anything real, like a gold bar, it could be encumbered, confiscated, and stolen. You’d have to trust the vault, the owner, the auditor and we’re back in the old system. At the same time, if Satoshi were keeping the Bitcoin record and had any human power over it at all, government could imprison him, pass a law, create a cease-and-desist, or demand he tamper with the record, which they did with e-gold. But Satoshi does not have that power, and no one else does either.

Why? Precisely because Bitcoin DOESN’T exist. It’s not a real thing. Or rather, the only “real” thing is the ledger itself which is already public to everyone everywhere. You can’t demand the secret keys to Bitcoin privacy because it’s already completely, entirely public. What would a government demand? Suppose they ordered a miner to alter the record: the other miners would instantly reject it and it would fail. Suppose they confiscated the ledger: they now own what everyone already has. Suppose they unplugged it: they would have to unplug the entire internet, and everything else on it, or every Bitcoin node, one-by-one, worldwide. If any nodes were ever turned on, all Bitcoin would exist again.

Can they track them down? Not really. In theory, Bitcoin can be written on paper without an Internet. In practice, any public or private keys certainly can be. So even chasing down the Internet it would be very difficult to stop it given sufficient motivation, like the Venezuelan hyperinflation where they are chasing down miners, wallets, and participants, and failing despite overwhelming force.

What about privacy? A completely public ledger recording every person and every transaction seems like a police state’s dream of enforcement and taxation. Is it private? Yes and no. The Bitcoin ledger is not written like “Senator Smith spent .0001 BTC on August 21st, 2015 to buy a sex toy from Guangzhou,” but Wallet #Hash2# transferred .00017 BTC to wallet #Hash3# at UTC 13:43:12 21:11:2017 – or not even that: it’s encrypted. Who is #Hash2#? You can go back, but it will only say #Hash2# exists and was created on Time:Date. Who is #Hash3#? The ledger only says #Hash3# was created a minute ago to receive the transaction. In fact, #Hash2# may have been created solely to mask the coin transferred from #Hash1#. So is it anonymous? Not exactly. Given enough nodes, enough access to the world’s routers, enough encryption, you might see #Hash2# was created in Pawtucket, and if #Hash2# is not using active countermeasures, perhaps begin to bring a cloudy metadata of #Hash2# possible transactions into focus, tying it to Amazon, then a home address, but the time and resources required to break through would be astronomical.

What about theft? Yes, like anything else it can be stolen. If you break into my house and tie me up, you can probably get the keys. This is also true online as you must log on, type a password that can be logged on a screen that can be logged over a network that can be logged, but think again about what you’re doing: does it make sense to break into every participant’s computer one by one? Most Bitcoin is held by a few early adopters, and probably those wallets were lost when their hard drives crashed, the users lost their passwords, or died before this computer experiment had any value. We know for a fact that all of Satoshi’s original coins, 2.2 million of them, have NEVER been spent, never moved on the ledger, suggesting either death or the austerity of a saint.

So even today hacking a wallet, is far more likely to net $1.00 than $1M. Take a page from Willie Sutton: when asked why he robbed banks, he said, “that’s where the money is.” So today. Where is the real money stolen, transferred? From the ’08 bailout, the kiting of fake bonds in the market, the MF Globals, the rigging of LIBOR or the fake purchase of EU bonds. You know, where the money is. At $160B market cap, Bitcoin is still one week’s purchase of central bank bond buying, i.e. a rounding error, no money at all. Hack a home wallet? I guess, but hacking Uber or Equifax once is a lot easier than hacking 100,000 wallets on 100,000 different computers. At least you know you’ll get something.

But MT Gox was hacked and 650,000 coins went missing. Surely Coinbase, Gemini, Poloniex are the same. Well…not exactly.

 

 


Gustave Courbet The wave 1870

 

 

Dr. D: You have to understand what exchanges are and are not. An exchange is a central point where owners post collateral and thereby join and trade on the exchange. The exchange backs the trades with their solvency and reputation, but it’s not a barter system, and it’s not free: the exchange has to make money too. Look at the Comex, which reaches back to the early history of commodities exchange which was founded to match buyers of say, wheat, like General Mills, with producers, the farmers. But why not just have the farmer drive to the local silo and sell there? Two reasons: one, unlike manufacturing, harvests are lumpy. To have everyone buy or sell at one time of the year would cripple the demand for money in that season. This may be why market crashes happen historically at harvest when the demand for money (i.e. Deflation) was highest. Secondly, however, suppose the weather turned bad: all farmers would be ruined simultaneously.

Suppose the weather then recovered: the previous low prices are erased and any who delayed selling would be rich. This sort of random, uncontrolled, uninsurable event is no way to run an economy, so they added a small group of speculators into the middle. You could sell wheat today for delivery in June, and the buyer would lock in a price. This had the effect of moderating prices, insuring both buyers AND sellers, at the small cost of paying the traders and speculators for their time, basically providing insurance. But the exchange is neither buyer, seller, nor speculator. They only keep the doors open to trade and vet the participants. What’s not immediately apparent is these Contracts of Wheat are only wheat promises, not wheat itself. Although amounts vary, almost all commodities trade contracts in excess of what is actually delivered, and what may exist on earth. I mean the wheat they’re selling, millions of tons, haven’t even been planted yet. So they are synthetic wheat, fantasy wheat that the exchange is selling.

A Bitcoin exchange is the same thing. You post your Bitcoin to the exchange, and trade it within the exchange with other customers like you. But none of the Bitcoin you trade on the exchange is yours, just like none of the wheat traded is actual wheat moving on trucks between silos. They are Bitcoin vouchers, Bitcoin PROMISES, not actual Bitcoin. So? So although prices are being set on the exchanges – slightly different prices in each one – none of the transfers are recorded on the actual Bitcoin Ledger. So how do you think exchanges stay open? Like Brokers and Banks, they take in the Bitcoin at say 100 units, but claim within themselves to have 104.

 

Why? Like any other fractional reserve system, they know that at any given moment 104 users will not demand delivery. This is their “float” and their profit, which they need to have, and this works well as far as it goes. However, it leads to the problem at Mt. Gox, and indeed Bear Sterns, Lehman and DeutscheBank: a sudden lack of confidence will always lead to a collapse, leaving a number of claims unfulfilled. That’s the bank run you know so well from Mary Poppins’ “Fidelity Fiduciary Bank”. It is suspected to be particularly bad in the case of Mt. Gox, which was unregulated. How unregulated? Well, not only were there zero laws concerning Bitcoin, but MTGOX actually stands for “Magic The Gathering Online eXchange”; that is, they were traders of comic books and Pokemon cards, not a brokerage. Prepare accordingly.

The important thing here is that an exchange is not Bitcoin. On an exchange, you own a claim on Bitcoin, through the legal entity of the exchange, subject only to jurisdiction and bankruptcy law. You do not own Bitcoin. But maybe Mt.Gox didn’t inflate their holdings but was indeed hacked? Yes, as an exchange, they can be hacked. Now you only need infiltrate one central point to gain access to millions of coins and although their security is far better, it’s now worth a hacker’s time. Arguably, most coins are held on an exchange, which is one reason for the incredibly skewed numbers regarding Bitcoin concentration. Just remember, if you don’t hold it, you don’t own it. In a hack, your coins are gone.

If the exchange is lying or gets in trouble, your coins are gone. If someone is embezzling, your coins are gone. If the Government stops the exchange, your coins are gone. If the economy cracks, the exchange will be cash-strapped and your coins are frozen and/or gone. None of these are true if YOU own your coins in a true peer-to-peer manner, but few do. But this is also true of paper dollars, gold bars, safe deposit boxes, and everything else of value. This accounts for some of the variety of opinions on the safety of Bitcoin. So if Polinex or Coinbase gets “hacked” it doesn’t mean “Bitcoin” was hacked any more than if the Comex or MF Global fails, that corn or Yen were “hacked”. The exchange is not Bitcoin: it’s the exchange. There are exchange risks and Bitcoin risks. Being a ledger Bitcoin is wide open and public. How would you hack it? You already have it. And so does everybody else.

So we’ve covered the main aspects of Bitcoin and why it is eligible to be money. Classically, money has these things:

1. Durable- the medium of exchange must not weather, rot, fall apart, or become unusable.

2. Portable- relative to its size, it must be easily movable and hold a large amount of value.

3. Divisible- it should be relatively easy to divide with all parts identical.

4. Intrinsically Valuable- should be valuable in itself and its value should be independent of any other object. Essentially, the item must be rare.

5. Money is a “Unit of Account”, that is, people measure other things, time and value, using the units of value to THINK about the world, and thus is an part of psychology. Strangely that makes this both the weakest and strongest aspect of:

6. “The Network Effect”. Its social and monetary inertia. That is, it’s money to you because you believe other people will accept it in exchange.

The Score:

1. Bitcoin is durable and anti-fragile. As long as there is an Internet – or even without one – it can continue to exist without decay, written on a clay tablet with a stylus.

2. Bitcoin is more portable than anything on earth. A single number — which can be memorized – can transport $160B across a border with only your mind, or across the world on the Internet. Its portability is not subject to any inspection or confiscation, unlike silver, gold, or diamonds.

3. Bitcoin is not infinitely divisible, but neither is gold or silver, which have a discrete number of atoms. At the moment the smallest Bitcoin denomination or “Satoshi” is 0.00000001 Bitcoin or about a millionth of a penny. That’s pretty small, but with a software change it can become smaller. In that way, Bitcoin, subject only to math is MORE divisible than silver or gold, and far easier. As numbers all Bitcoin are exactly the same.

4. Bitcoin has intrinsic value. Actually, the problem is NOTHING has “intrinsic” value. Things have value only because they are useful to yourself personally or because someone else wants them. Water is valuable on a desert island and gold is worthless. In fact, gold has few uses and is fundamentally a rock we dig up from one hole to bury in another, yet we say it has “intrinsic” value – which is good as Number 4 said it had to be unrelated to any other object, i.e. useless. Bitcoin and Gold are certainly useless. Like gold, Bitcoin may not have “Intrinsic value” but it DOES have intrinsic cost, that is, the cost in time and energy it took to mine it. Like gold, Bitcoin has a cost to mine measurable in BTU’s. As nothing has value outside of human action, you can’t say the electric cost in dollars is a price-floor, but suggests a floor, and that would be equally true of gold, silver, copper, etc. In fact, Bitcoin is more rare than Rhodium: we mine rare metals at 2%/year while the number of Bitcoins stops at 22 Million. Strangely, due to math, computer digits are made harder to get and have than real things.

5. Bitcoin is a unit of account. As a psychological effect, it’s difficult to quantify. Which comes first, the use of a thing, or its pricing? Neither, they grow together as one replaces another, side-by-side. This happened when gold replaced iron or salt or when bank notes replaced physical gold, or even when the U.S. moved from Pounds and Pence to Dollars and Cents. At first it was adopted by a few, but managed to get a critical mass, accepted, and eventually adopted by the population and entirely forgotten. At the moment Bitcoin enthusiasts do in fact mentally price things in Bitcoins, especially on exchanges where cross-crypto prices are marked vs BTC. Some never use their home currency at all, living entirely according to crypto-prices until home conversion at the moment of sale, or as hundreds or thousands of businesses are now accepting cryptocurrencies, even beyond. For them it is a unit of account the way Fahrenheit is a unit within the United States.

6. Bitcoin has the network effect. That is, it is widely accepted and publicly considered money. It’s in the news, has a wide following worldwide, and exchanges are signing up 40,000 new users a month. It’s accepted by thousands of vendors and can be used for purchases at Microsoft, Tesla, PayPal, Overstock, or with some work, Amazon. It’s translatable through point-of-sale vendor Square, and from many debit card providers such as Shift. At this point it is already very close to being money, i.e. a commonly accepted good. Note that without special arrangements none of these vendors will accept silver coins, nor price products in them. I expect if Mark Dice offered a candy bar, a silver bar, or a Bitcoin barcode, more people would pick the Bitcoin. In that way Bitcoin is more money than gold and silver are. You could say the same thing about Canadian Dollars or Thai Bhat: they’re respected currencies, but not accepted by everyone, everywhere. For that matter, neither are U.S. dollars.

 

Note what is not on the list: money is not a unit created or regulated by a central authority, although governments would like us to think so. In fact, no central authority is necessary or even desirable. For centuries the lack of monetary authority was historic fact, back with medieval markets through to private banks, until 1913, 1933, 1971, and the modern evolution into today’s near-total digital fiat. Besides the technical challenge, eliminating their overhead, oversight, control and corruption is the point of Bitcoin. And right now the government’s response to Bitcoin is a strange mixture of antipathy, ignorance, oppression, and opportunity. At $160 Billion it hardly merits the interest of a nation with a $500 Billion trade deficit, and that’s spread worldwide.

This leads into one of the spurious claims on Bitcoin: that it’s a refuge for drug smugglers and illegal activities. I assure you mathematically, that is not true. According to the U.N. the world drug trade is $435B, 4 times the total, and strictly theoretical value of Bitcoin, coins locked, lost, and all. Besides if you owned $160B coins, who would you transfer them to? You’re the only user. $435B/year can only be trafficked by major banks like as HSBC, who have paid public fines because money flows that large can’t be hidden. This is so well-known the U.N. suggested the drug-money flows may be one reason global banks were solvent in ‘08. Even $160B misrepresents Bitcoin because it had a 10-fold increase this year alone. So imagine $16B total market cap. That’s half the size of the yearly budget of Los Angeles, one city. Even that overstates it, because through most of its life it’s been around $250, so imagine a $4B market cap, the budget of West Virginia.

So you’re a drug dealer in illicit trades and you sell to your customers because all your buyers have Bitcoin accounts? Your pushers have street terminals? This doesn’t make sense. And remember as much as the price of Bitcoin has risen 40-fold, the number of participants has too. Even now, even with Coinbase, even with Dell and Overstock, even with BTC $10,000 almost no one has Bitcoin, even in N.Y.C. or S.F.. So who are these supposed illegal people with illegal activities that couldn’t fit any significant value?

That’s not to say illegal activities don’t happen, but it’s the other half of the spurious argument to say people don’t do illegal acts using cash, personal influence, offshore havens, international banks like Wells Fargo, or lately, Amazon Gift Cards and Tide Detergent. As long as there is crime, mediums of value will be used to pay for it. But comparing Bitcoin with a $16B market cap to the existing banking system which the U.N. openly declares is being supported by the transfer of illicit drug funds is insanity.

Let’s look at it another way: would you rather: a) transfer drugs using cash or secret bank records that can be erased or altered later or b) an public worldwide record of every transaction, where if one DEA bust could get your codes, they could be tracked backwards some distance through the buy chain? I thought so. Bitcoin is the LEAST best choice for illegal activities, and at the personal level where we’re being accused, it’s even worse than cash.

We showed that Bitcoin can be money, but we already have a monetary and financial system. What you’re talking about is building another system next to the existing one, and doubling the costs and confusions. That’s great as a mental exercise but why would anyone do that?

In a word: 2008.

It’s probably not an accident Bitcoin arrived immediately after the Global Financial Crisis. The technology to make it possible existed even on IRC chat boards, but human attention wasn’t focused on solving a new problem using computer software until the GFC captured the public imagination, and hackers started to say, “This stinks. This system is garbage. How do we fix this?” And with no loyalty to the past, but strictly on a present basis, built the best mousetrap. How do we know it’s a better mousetrap? Easy. If it isn’t noticeably better than the existing system, no one will bother and it will remain an interesting novelty stored in some basements, like Confederate Dollars and Chuck-e-Cheez tokens. To have any chance of succeeding, it has to work better, good enough to overcome the last most critical aspect money has: Inertia.

So given that Bitcoin is unfamiliar, less accepted, harder to use, costs real money to keep online, why does it keep gaining traction, and rising in price with increasing speed? No one would build a Bitcoin. Ever. No one would ever use a Bitcoin. Ever. It’s too much work and too much nuisance. Like any product, they would only use Bitcoin because it solves expensive problems confronting us each day. The only chance Bitcoin would have is if our present system failed us, and fails more every day. They, our present system-keepers, are the ones who are giving Bitcoin exponentially more value. They are the ones who could stop Bitcoin and shut it down by fixing the present, easy, familiar system. But they won’t.

 

Where has our present system gone wrong? The criticisms of the existing monetary system are short but glaring. First, everyone is disturbed by the constant increase in quantity. And this is more than an offhand accusation. In 2007 the Fed had $750B in assets. In 2017 they have $4.7 Trillion, a 7-fold increase. Where did that money come from? Nowhere. They printed it up, digitally.

 

 

The TARP audit ultimately showed $23 trillion created. Nor was the distribution the same. Who received the money the Fed printed? Bondholders, Large Corporations, Hedge Funds and the like. Pa’s Diner? Not so much. So unlike Bitcoin, there not only was a sudden, secret, unapproved, unexpected, unaccountable increase in quantity, but little to no chance for the population to also “mine” some of these new “coins”. Which leads to this:

 

 

Near-perfect income disparity, with near-perfect distribution of new “coins” to those with access to the “development team”, and zero or even negative returns for those without inside access. Does this seem like a winning model you could sell to the public? Nor is this unique to the U.S.; Japan had long ago put such methods to use, and by 2017 the Bank of Japan owns a mind-bending 75% of Japanese ETFs:

 

 

So this unelected, unaccountable bank, which creates its coin from nothing without limit or restraint, now owns 75% of the actual hard labor, assets, indeed, the entire wealth HISTORY of Japan? It took from the Edo Period in 1603 through Japan-takes-the-world 1980s until 2017 to create the wealth of Japan, and Kuroda only 6 years to buy it all? What madness is this?

Nor is Europe better. Mario Draghi has now printed so much money, he has run out of bonds to buy. This is in a Eurozone with a debt measuring Trillions, with $10 Trillion of that yielding negative rates. That’s a direct transfer from all savers to all debtors, and still the economy is sinking fast. Aside from how via these bonds, the ECB came to own all the houses, businesses, and governments of Europe in a few short years, does this sound like a business model you want to participate in?

So the volume of issuance is bad, and unfairness of who the coins are issued to is as bad as humanly possible, giving incredible advantages to issuers to transfer all wealth to themselves, either new or existing.

But if the currency is functional day-to-day, surely the issuance can be overlooked. Is it? Inflation is devilishly hard to measure, but here’s a chart of commodities:

 

 

CPI:

 

 

The US Dollar:

 

 

or vs Gold (/silver):

 

 

Does that look stable to you? And not that Bitcoin is stable, but at least Bitcoin goes UP at the same rate these charts are going DOWN. One store coupon declines in value at 4% a year, or may even start negative, while the other gives steady gains to loyal customers. Which business model would you prefer?

But that’s not all.

 

 


Gustave Courbet The wave 1870

 

 

Dr. D: The money, the unaccountable, uninhibited release of tokens can do more than just buy centuries of hard labor in seconds, it‘s also a method of control. Banks, our present issuers of money, can approve or destroy businesses by denying loans. They can do this to individuals, like denying loans to unpopular figures, or to whole sectors, like gun shops. They can also offer money for free to Amazon, Facebook, and Tesla, which have no profitable business model or any hope of getting one, and deny loans to power plants, railroads, farms, and bridges as they fall into the Mississippi.

The result is banks and their attending insiders are a de facto Committee of Central Planners in the great Soviet style. What is fashionable and exciting to them can happen, and what they dislike or disapprove of for any reason can never happen. And once on a completely fiat system, this is how capital is allocated through our entire system: badly. What’s worse has been a 20-year turn toward Disaster Capitalism, whereby loans are extended to a business, sector, person, or nation, and then suddenly cut off, leading to the rapid foreclosure and confiscation of companies, assets, or continents by the “Development Team.”

Imagine a Bitcoin where Satoshi could erase your coins in your wallet for giving him a bad haircut. Or because he likes your wife. Nor is there any help for independent nations like Iran, or even nuclear powers like Russia. Both have been cut off, their funds suspended at a whim with no recourse. Even being a fellow insider is no insurance, as the NY banks cut off Lehman from funds they were owed, driving it into bankruptcy to buy the pieces in receivership. Unpopular Billionaires are treated likewise. This is a system with no justice, no order, no rules, and no predictability. Anyone within it is at grave and total risk. And yet before Bitcoin it was the only system we had, short of returning to the 19th century, it was the only way for modern commerce to deliver food, water, power, or function at all.

This is seen in its abuses, but also by its effects. The present system not only controls whether you are a winner or loser, whether you may go or stay, whether you may live or die, but also tracks every purchase, every location, in effect, every action throughout your entire life. These records will describe what books you read, what movies you watch, what associates you have, in real time Already these daily actions are being approved or denied. Take out a variable-rate jumbo loan? We’ll give you 110% of the value, paying you to be irresponsible (we’ll foreclose later). Want to buy gas when driving through Cheyenne 3:30 at night? Sorry, we disabled your card as a suspicious transaction. Sorry about you dying there of crime or of cold; we didn’t know and didn’t care. All your base are belong to us.

 

You say you don’t care if JP Morgan has your pay stubs to disturbing porn sites and Uber purchases to see your mistress? Well the future Mayor of Atlanta will, and he hasn’t graduated college yet. With those records it’s child’s play to blackmail policemen, reporters, judges, senators, or generals, even Presidents. And all those future Presidents are making those purchases right now, the ones that can be spun into political hay, real or unreal. So if you don’t worry what everyone knows about you, that’s fine, but imagine reading the open bank records, the life histories of every political opponent from now until doomsday. Then Don’t. Do. It. The people who have those records – not you – then have not just all the assets, not just all the money, but all the power and influence. Forever.

Are you signing up for that? Bitcoin doesn’t. Bitcoin doesn’t care who you are and with some care can make it very difficult to track you. And without tracking you, it makes it impossible to boycott you. And without a central repository, it’s impossible to march in with tanks and make them give you the records, turn money on or off, to make other people live or die and bend to your will by violence.

No one will care about that, because no one cares about it now unless, like Russia or China, it’s directed at them personally and then it’s too late. The real adoption of Bitcoin is far more mundane.

The long-term interest rate is 5%. Historically banks would lend at 8%, pay at 4%, and be on the golf course by 5. No one thought much about it because like a public utility, banking was a slow, boring affair of letting business do business. You know, farming, mining, manufacturing, all that stuff we no longer do. For decades, centuries even, banking was 5%-15% of a nation’s GDP, facilitating borrowers and lenders and timescales, paying for themselves with the business efficiencies they engender.

 

 

 

 

All that changed after WWII. Banks rose in proportion to the rest of the economy, passing the average, then the previous high, then when that level reached “Irrational Exuberance”, Greenspan started the printing presses, free money was created, and Senators and Presidents whose bank records were visible suddenly repealed Glass-Steagall. An economy stretched to breaking with free, centrally-allocated and misallocated money crashed and shrank, yet the banks– now known as the FIRE stocks: Finance, Insurance, and Real Estate – kept growing. How can banks and finance keep growing with a shrinking economy? By selling their only product: debt.

How do you sell it? Reduce the qualifications past zero to NINJA-levels, and use your free money to FORCE people to take it via government deficits and subsidized loans. No normal economy could do this. No normal business model could do this. Only a business now based on nothing, issuing nothing, with no restraint and no oversight. And the FIRE sector kept growing, through 15%, 20%, 25% until today most of U.S. GDP is either Finance selling the same instruments back and forth by borrowing new money or GDP created by governments borrowing and spending.

Remember when we started, banks paid 4% and charged at 8%. Now they openly take savings with negative interest rates, and charge at 30% or higher on a credit card balance averaging $16,000. And still claim they need bailouts comprising trillions a year because they don’t make money. The sector that once facilitated trade by absorbing 5% of GDP is now 5x larger. There’s a word for a body whose one organ has grown 5x larger: Cancer. Unstopped, it kills the host.

 

What does this have to do with Bitcoin? Simple. They’re charging too much. They’re making too much both personally and as a group. They’re overpriced. And anything that’s overpriced is ripe for competition. And the higher the markup, the more incentive, the more pressure, the more profit there is to join the upstart. Bitcoin can economize banking because what does banking do? It saves money safely, which Bitcoin can do. It transfers money on demand, which Bitcoin can do. It pays you interest, which mining or appreciation can do.

It also can lend, register stocks and ownership, rate credit risks, and allocate capital which other non-Bitcoin Tokens can do. In short, it can replace the 25% overpricing of the financial sector. If it could reduce the overhead of outsized profit, the misuse of expensive brainpower, of Wall Street and London office space, and reduce financial costs to merely 10% GDP, it could free up 20% of GDP for productive purposes. Why did you think Detroit and Baltimore fell in on themselves while N.Y. and D.C. boomed? That’s the 30% they took, $4B a year, from every other state, every year for 40 years.

That money and that brainpower could be much better allocated elsewhere, but so long as the Finance sector can print free money and buy free influence, they will never stop on their own. Only an upstart to their monopoly can cure the cancer and bring them back to a healthy size and purpose. Bitcoin can do this only because they charge too much and do too little. Of course, they could go back to paying 4% and charging 8% with a CEO:employee pay ratio of 20:1 but history says it will never happen. Only a conflict, a collapse, or competition can reform them, and however long it takes, competition is by far the best option.

 

 

So why would people pick Bitcoin? It costs less and does more. Amongst adopters, it’s simpler and more direct. It pays the right people and not the wrong ones. It rewards good behavior instead of bad, and can help producers instead of parasites. It’s equitable instead of hierarchical. What else? While not Bitcoin proper, as a truth machine Blockchain technology is the prime cure for the present system’s main problem: fraud. There is so much fraud at the moment, libraries of books have been written merely recording the highlights of fraud since 2001. But merely recording the epic, world-wide, multi-trillion dollar frauds clearly does not cure it. Like other human problems, no one cares about your problems, only your solutions, and Blockchain has the solution.

While the details of fraud are complex, the essence of fraud is quite simple: you lie about something in order to steal it. That’s it. It could be small or large, simple or complex, but basically fraud is all about claiming what didn’t happen. However, the Blockchain is all about truth, that is, creating consensus about what happened, and then preserving it. Take the Robosigning scandal: accidental or deliberate, the mortgage brokers, banks, and MBS funds lost the paperwork for millions of houses. A house could be paid off could be foreclosed, as happened, or it could be owned 5 times, as happened. Like the Sneeches, no one knew which one was who, and the only certainty was that the official authority – county courthouses – did not know because to register there would have cost Wall Street and inconvenient millions or billions in shared tax stamps.

The system broke down, and to this day no one has attempted to define ownership, choosing instead to usher all the questionable (and therefore worthless) material into the central bank and hiding it there until the mortgage terms expire, forcing the taxpayers to bail out a multi-trillion dollar bank fraud at full value. And this is just one messy example. The S&L crisis was not dissimilar, nor are we accounting for constant overhead of fees, mortgage transfers, re-surveys, and title searches nationwide.

 

With Blockchain it’s simple: you take line one, write the information, the owner, title, date, and transfer, and share it with a group. They confirm it and add mortgage #2, then #3 and so on. It’s a public ledger like the courthouse, but the system pays the fees. It also can’t be tampered with, as everyone has a copy and there is no central place to bribe, steal, and subvert as happened in 2006 but also in history like the 1930s or the railroad and mining boom of the 1800s. If there are questions, you refer to the consensus If it’s transferred, it is transferred on the ledger. If it isn’t on the ledger, it isn’t transferred, same as the courthouse. Essentially, that’s what “ownership” is: the consensus that you own something. Therefore you do not have a mortgage due disappear, or 4 different owners clamoring to get paid or take possession of the same property, or the financial terrorism of shattering the system if you even attempt to prosecute fraud.

It’s not just mortgages: stocks have the same problem. Since the digital age began, the problem of clearing stock trades has steadily increased. Eventually, the NYSE trading volume was so large they couldn’t clear at all, and the SEC let trading houses net their internal trades, only rectifying the mismatches between brokerages. Eventually, that was too large, and they created the DTCC as a central holder and clearing house. Yet, in an age of online trading and high-frequency trading mainframes, it became apparent there was no way to clear even residual trades, and they effectively no longer try, and the SEC, instead of forcing them to compliance, lets them. There are 300M failed stock trades a day and $50B a day in bond failures, or $12 Trillion year in bonds alone. And so? If you sell your stocks and bonds, the brokerage makes it come out whole, so what?

 

 


Gustave Courbet The wave 1871

 

 

Dr. D: Well, all parts of the system rely on accurate record-keeping. Look at voting rights: we had a security company where 20% more people voted than there were shares. Think you could direct corporate, even national power that way? Without records of transfer, how do you know you own it? Morgan transferred a stock to Schwab but forgot to clear it. Doesn’t that mean it’s listed in both Morgan and Schwab? In fact, didn’t you just double-count and double-value that share? Suppose you fail to clear just a few each day. Before long, compounding the double ownership leads to pension funds owning 2% fake shares, then 5%, then 10%, until stock market and the national value itself becomes unreal. And how would you unwind it?

Work backwards to 1999 where the original drop happened? Remove 10% of CALPERs or Chicago’s already devastated pension money? How about the GDP and national assets that 10% represents? Do you tell Sachs they now need to raise $100B more in capital reserves because they didn’t have the assets they thought they have? Think I’m exaggerating? There have been several companies who tired of these games and took themselves back private, buying up every share…only to find their stock trading briskly the next morning. When that can happen without even a comment, you know fraud knows no bounds, a story Financial Sense called “The Crime of the Century.” No one blinked.

But it doesn’t stop there. You don’t only buy stocks, you sell them. And you can sell them by borrowing them from a shareholder. But what if there’s no record of delivery? You can short or sell a stock without owning any. And the more you sell, the more it drives the price down and the more money you make. In fact, profits are infinite if you can sell enough that the company goes bankrupt: you never have to repay the stock at all. And this “naked” short selling can only occur if there’s openly bad recording and enough failures-to-deliver to hide it. You could literally own nothing, borrow nothing, post nothing, and with no more than insider access to an exchange, drive a company out of business. That’s how crucial recording is.

And while for appearance’s sake, they only attack and destroy small plausibly weak stocks, Overstock.com with a $1.45B market cap fought these naked short sellers for years. Publicly, openly, vocally, with the SEC. Besides eroding their capital, besides their legal fees, besides that e.g. Amazon could pay to have their competition run out of business with fraudulent shorting, the unlimited incentive to short instead of long on small companies could suppress the entire stock market, indeed the national wealth and GDP. It may account for some of the small caps underperforming their potential for years, and why an outsized portion of stock value to be in just the 5 protected FAANG or DOW 30 stocks. …We don’t know, because we have no honesty, no accounting, and nothing to compare it to. But no one cares, because it’s been going on for 20 years, and if they cared, they’d do something about it. Again, no one cares about your problems, only your solutions. Even if the nation falls.

 

Look at it from their point of view: if you’re a business owner, now you can’t rationally list your corporation. Your stock could be manipulated; your business could be bankrupted for no reason at all. We’ve seen the NYSE shrink as businesses start to list in more honest jurisdictions, and even Presidents can’t convince them to come back. Traders and Fund Managers retire in public interviews, telling the world there is no longer any sense or price discovery, and therefore there is market madness.

Yet we just said that to clean up the market would discover 10%, 20%, 40% fake shares, fake business values, fake pension values, therefore fake GDP values, and fake GDP to Debt ratios, and therefore would perhaps lead to an accurate Debt to GDP of 140%, which would crash the U.S. dollar and possibly the nation. Would a complete U.S. financial collapse lead to a nuclear war? And it all goes back to fraud we didn’t stop 20 years ago. How do you solve the problem? The only way out without collapse is to build an honest system parallel to the existing system and slowly transfer assets from the rotten, sinking ship to the new one. The captains of the old ship may not like it, but look at the incentives. No one can tolerate the old ship except the pirate captain; even the crew, the stock traders, don’t want or control it any more.

However, what if you created an honest stock market Blockchain that actually had the stock certificates and actually transferred them, cheaply and reliably without false duplication? This is what is happening in the Jamaican Stock Market. A new company can choose to list on the stock Blockchain and avoid the old system. Other companies or even the whole exchange can clean up the books, slowly, stock by stock, and move it to the new honest system. Because they’re honest? No way! No one cares about truth or honesty, clearly. Because they can sell their stock exchange as superior, solving the existing problems. Stopping fraud, theft, the stealing or crippling of companies, fake voting, depression of Main Street and outsiders in favor of Wall Street and insiders, this is what Blockchain can do. In short, it would work better, cheaper.

What else can Blockchain do?

Blockchain is just software written by programmers so it’s as versatile as any other software. So why not program things into it with a “Smart Contract”? Suppose you make a bet: IF the Packers beat the Lions on November 12, 2017, THEN I will pay you $50. You set up the contract, and the bot itself can look for the headlines and transfer the money when the conditions are met.

That’s pointless but how about this: You run a jewelry business on Etsy and need to buy $500 in beads from Hong Kong. Normally, you would need to pay an importer, a currency exchange, bank account, tire transfer, escrow account, and a lawyer, or their proxies within the system, plus two weeks’ clearing time. That’s a lot of overhead for a small transaction. In contrast, a smart contract such as Ethereum could post the value of the coin (escrow), and when Long Beach or FedEx confirms delivery, releases the Ethereum, a coin of value, to the seller in Hong Kong. Instantly. Why? The existing financial system is charging too much and doing too little. That’s a huge incentive to get around their slow, overpriced monopoly.

 

Once you cut the costs, have a more direct method, and reduce the time to minutes, not weeks, the choice is obvious, which may explain why Microsoft, Intel, and others are deep in ETH development. Why overpay for bad service, and support the overpriced bonuses of men who will use their power to turn on or shut off your livelihood at will? Blockchain costs less and does more. Being just software, there are many other software products serving hundreds of other business plans. These use-coins are generally called “Tokens”, whereas“Coins” are meant to be pure currencies. There are Tokens for a wide variety of business purposes: online gambling? Yes. Tokens to buy marijuana in certain states? Sure.

But how about a Token like Populous that contains the credit information of small businesses worldwide, so you can make modest income lending against their accounts receivable? You get more income, business worldwide gets better service and lower costs. Why? The existing financial system is charging too much and doing too little. How about a Token like Salt for personal loans and perfecting collateral? They will lend cash against your Cryptocurrencies, because if your loan falls short, they can sell your collateral instantly. No foreclosures, no repossessions, no overhead.

This is what banks do when they hold your savings and checking accounts, yet sell you a personal loan. But the banks are giving you no interest on savings, while charging origination fees and high interest. They’re charging too much and doing too little. Well, you say, this sounds too good to be true: a parallel system to replace our existing corrupt, broken, overpriced one. One that doesn’t have to confront existing power or reform the system, but beyond price appreciation has its own incentives to join? Surely there are problems.

Oh, yes. So many problems. The first is often mentioned: it’s fine that Bitcoin is a finite commodity with only 22M coins, and if Bitcoin were the only coin, that would work. But there are over 1,000 coins now, and more every day. Isn’t that just another avenue to unlimited issuance and inflation by unlimited, unregistered people? Well, yes and no. It’s true that anyone can start their own Bitcoin – Litecoin for example is a faster duplicate of Bitcoin – but it’s also true that anyone can start their own Facebook. MySpace certainly did.

 

So why don’t they? Basically because of financial inertia, the Network Effect, a coin you start and only you use is worthless. The value is in the belief that other people will use it. Without that, you’re banished to MySpace Siberia. Still, with a 1,000 coins, don’t they all compete? Yes, and that’s a good thing, not bad. This is no different than the competing Bank Notes of the 19th century. If you like this bank and believe in them, you prefer their notes to others. Or you might use one note in Missouri and another in Louisiana. So with Cryptos. You might choose Bitcoin, with slow traffic and high costs to pay for a house. But you would choose Litecoin to pay for coffee.

You already do this, no different than using cash to buy a hot dog, your debit card for groceries, and a bank transfer for a car. It’s overlooked because they’re all called “dollars,” but they’re not. One is currency, one is a short-term credit, and one is a banking ledger. Because of the Network Effect, you can’t have 1,000 equal coins and have them all work. The market will prefer some over others until there are only a few, just as AskJeeves and Infoseek gave way to Google, which may someday give way to someone else. Just as you can’t start a new Google today, there are only a few top coins, easily updated, and little space for new coins.

In addition, the “1,000 coins” are not actually coins. Most of the new coins are Tokens, which are not “currencies” like Bitcoin and a means of exchange, but business models and services. Like Bank Notes, the market is self-limiting, but evolving. But if there are a variety of coins, and like Litecoin they can suddenly appear and change, what reassurance do you have that your Bitcoin “money” is worth anything? Like 19th century Bank Notes or AskJeeves, your responsibility is to be aware of the market and the changing values and react accordingly. And in a mature market, “everyone knows” the histories and reputations, but in a young market, like Dell and Gateway in 1992, no one knows. But that’s also why there is more profit now as well as more risk. But we’re also watching volatility and risk in Pounds, Lira, Gold, or even outright defaults like Argentine Pesos or Rubles. We already carry that risk, but it’s familiar and taken for granted.

If coins can just “change” and “fork” whenever they want, then isn’t it like buying Australian Dollars, then waking up and finding they’re Yen? Yes and no. Like other cryptos, Bitcoin is just software written by men. So a group of developers may think Bitcoin should remain the same while the old team thinks it should be improved so much that they do the work, write the updates, and release it. Well you have a “fork”, but what happens next is the Network Effect. So you’re a miner and a user of Bitcoin. You now have a choice: do you use the new software, the old software, or both? Everyone expected one to be adopted, and the old one to wither into oblivion. Since a Fork gives you one unit of each, the eventual outcome was a wash within the user group. But that doesn’t seem to be happening.

Ethereum forked, and Ethereum Classic still exists, and trades steadily but far less. Bitcoin Cash Forked and although 1/10th the price, both are trading briskly. No one knows what will happen, because it’s never existed before. So yes, you could wake up and find you don’t like what Bitcoin decided to do, just as you could wake up and not like your new bank manager or CFO of Dell, and then you sell that asset and choose another. That’s your responsibility. That’s competition.

Besides unexpectedly finding both forks have value, there is an upside to the downside. If some new advance in speed or encryption appears in Litecoin or Dash, Bitcoin can also adopt it. This not only improves the market, but reduces sudden upsets as new advances shouldn’t unseat popular coins but are adopted by them. Indeed, this was the purpose of Bitcoin Cash fork: to improve speed and cost. Yet now they both exist for different purposes in the market. Another objection is that cryptos depend on electricity and an expensive, functioning Internet. True. But while I’m no fan of technology, which is full of problems, so does everything else. Without electricity, the western world would stop, with no water, no heat, and no light.

Without Internet, our just-in-time inventory halts, food and parts stop moving, banking and commerce fail. You’re talking Mad Max. TEOTWAWKI. That’s a grave problem, but not unique to Bitcoin.

 

 


Gustave Courbet Sunset on Lake Geneva 1876

 

 

Dr. D: Bitcoin can be stolen. Although “Bitcoin” can’t be hacked, it’s only software and has many vulnerabilities. If held on an exchange, you have legal and financial risk. If held at home, you could have a hard drive fail and lose your passwords. If it’s on a hardware fob like a Trezor, the circuits could fail. For a robust system, computers themselves are pretty fragile. You could write down your passwords on paper, and have a house fire. You could print out several copies, but if any of the copies are found, they have full access to your account and stolen without you knowing. You could have your passwords stolen by your family, or have a trojan take a screen or keystroke capture.

Hackers could find a vulnerability not in Bitcoin, but in Android or AppleOS, slowly load the virus on 10,000 devices, then steal 10,000 passwords and clear 10,000 accounts in an hour. There are so many things that can go wrong, not because of the software, but at the point where you interface with the software. Every vault has a door. The door is what makes a vault useful, but is also the vault’s weakness. This is no different than leaving blank checks around, losing your debit card, or leaving cash on your dashboard, but it’s not true that there are no drawbacks. However the risks are less obvious and more unfamiliar.

Bitcoin isn’t truly anonymous. If someone, the NSA, wanted to track your drug purchases on SilkRoad, they could follow the router traffic, they could steal or work out your keys, they could eventually identify your wallet, and from there have a perfect legal record of all your transactions. Defenders will say that wallets are anonymous, that like Swiss accounts, we have a number, but not a name, and you can create new numbers, new wallets endlessly at will. Fair enough, but if I can see the transfers from the old to the new, it can be tracked. If I can get your account number by any means, I can see the flows. To some extent it’s speculation because we don’t know what technology they have available to crack codes, to see into routers, Internet traffic and servers.

Could there be a hidden exploit not in “Bitcoin” but in AES256 or the Internet itself? Maybe. Are there secret code-breaking mainframes? Possibly. But given enough interest, we can be sure that they could always get a warrant and enter your house, hack your computer, and watch your keyboard. However, this is no different than cash. If necessary, they can already track every serial number of every bill as it leaves an ATM or a drug sting. Then you follow those serial numbers as they are deposited and reappear. I expect Bitcoin is not very different, and like cash, is only casually anonymous. But is this a problem with cash? Or with Bitcoin? Your intent as a citizen is to follow the law, pay your taxes, and not hurt others. If government or other power centers are willing to expend that much effort to track you, perhaps the problem should be addressed with proper oversight on warrants and privacy.

Bitcoin is slow and expensive. Very true. Bitcoin Core has gotten so outsized from its origins that it may soon cost $5 to buy a $1 coffee and 48 hours to confirm the purchase. That’s clearly not cheaper, faster, OR better. It’s worse: far, far worse. Nor can it improve. Since Blockchain writes the ledger, the longer the ledger, the bigger it is. Technically, it can only clear a few transactions per second. This problem may not doom it, but it would relegate it to only huge, slow transactions like moving container ships. That is, a form of digital gold note. We don’t actually ship gold or whatever to pay for transactions; it just sits in the background, an asset. Per Satoshi, Bitcoin is a “Digital Asset.”

 

And the core team seems to like this more secure, higher value direction, where these obstacles are acceptable. But without a larger, deeper market, it’s the plaything of billionaires and then who sets the price? It becomes another experiment, an antique. Luckily, the story doesn’t stop there. Because it’s only software, you can always change it if you can convince the participants to use the new version. Bitcoin Cash is a fork that it larger, faster, and cheaper, reducing the limitations for now. And it can become Segwit2 or Cash2 later if the community agrees. But by design Bitcoin is not meant to be instant nor free, and probably never will be. Like gold, it is meant to be expensive, vaulted, and rarely moved. If you want fast and cheap, LiteCoin, Dash, and many others are vying to be the digital silver or digital payment card. That’s not very different from the gold standard, or even payments today.

Bitcoin is a huge electric and Internet drain. This is true. However, it’s also misrepresented. What is the electric overhead of every bank, every terminal, every mainframe on the NYSE, every point-of-sale card machine, every cash register and router in retail? Don’t we use an awful lot of electric to keep those running? What about their cost, the repairmen, the creation of new systems every year from mine to market, from idea to update release, to replace them? We also personally have our computers and routers, the whole Internet on and idling. What’s the base cost? Is it fair to compare as if it were a pasture before Bitcoin arrived?

We built the existing system this way because it gained efficiency. Time in the clearing, price in not running typewriters and mail worldwide, and of course taxes. We’re talking about creating a parallel financial system here. If the old one is replaced, is the new one better, or worse? Mining takes a lot of power, but the math in Bitcoin is meant to get increasingly harder to compensate for increasing computer speed. The computers are supposed to be on to confirm transactions. That means that the more people use it, the more power consumed, but that’s true of everything. The more people that drive cars, the more gas is used. So is the car doing something useful and being used well? Is it replacing a less efficient horse, or just wasting energy better used elsewhere? These are complex questions.

At the least, Bitcoin uses far, far too much energy in the design, and because of the speculation, far too many people are mining it without using it. However, all of the subsequent coins were concerned about this, and their power consumption is far, far less. As Bitcoin is near its hardest stage and stops at 22 Million, power consumption is near peak, but should stabilize, or even fork to a low-energy proof-of-stake model. As Bitcoin is not well-suited to worldwide transactions, it should be replaced with less-power intensive alternatives, and because of this, may get smaller. And if it replaces some of the existing system, it can generate an offset. But yes, if it uses too much power, is too inefficient by design, it will be too expensive, abandoned, and fail.

 

Are Cryptos a scam? Probably not: we pointed out some legitimate uses above for both coins and tokens. But there’s one coin that arguably is a Ponzi, a dozen coins that are scams, scores that are terrible ideas like Pets.com and will fail, and another dozen good, well-meaning tokens that are honest but ultimately won’t succeed. Yet, like the .Com 90’s, there are probably some like Apple that rise far more than it seems they should, and by surviving, effectively give 16% compounded returns for 40 years, front-loaded. That’s the nature of business. But are many coins and tokens open scams that run off with your money? Yes. Are others worthless? Yes. It’s also true of the stock and bond market and can’t be helped. Buyer beware.

Is Bitcoin a Ponzi? It’s not a Ponzi by definition because there is no central thief, nor are new investors paying off old investors. So is it a fraud, misrepresenting a few hours of electricity as worth $10,000? Well, that depends on what you think its value is. Is it providing value, a service? If so, what is that service worth to you? We already said it has the operational elements of money, with the addition of being extremely transmissible and transportable. If that has value to you, fine, if not, perhaps gold or bonds are more appropriate. But that’s the problem of what gives Bitcoin value.

A stock or bond you can look at the underlying asset, the profit or income flows, the book value. But Canadian or New Zealand dollars? What gives them value? They’re also backed by nothing. What gives gold value? It has no income, just popularity. Likewise Bitcoin: what gives it value is that other people want it. If they stop wanting it, it has no value, but that’s psychological and can’t be directly measured. With that in mind, is its fair value $1K or $1B? No one knows. Can its value fall from $10k to $5k? Yes, and it has many times. Only the market, that is, we can decide what it’s worth to us, and the market is small and immature, with no price history and prone to wild swings.

Shouldn’t the exchanges set the price? Yes, and they do, but how is that accomplished? We already said the Exchanges do internal trading off-ledger, outside Bitcoin. So aren’t they setting the price on the exchange instead of the people setting the price peer-to-peer? It would seem so. So aren’t they subject to market manipulation? Although at the moment they have a fairer design, and smaller pipelines to the larger market of money, yes. So if they launch a Bitcoin future, a tracker, a triple-short ETF, internally inflate their holdings, wouldn’t that make it subject to corruption and thus back into the existing system?

No one knows: it’s never been done before. I suspect not, but only because the people want Bitcoin specifically because it is Outside-system, Anti-fraud and watch these things carefully. But it’s run by humans and reflect human nature: that means over time some new form of exchange and corruption can grow up around it as before. While the ability to rig Bitcoin is limited because the quantity of Bitcoin is limited and riggers must first buy Bitcoin fairly, the Exchanges and the price-setting are an issue, and especially into the future.

 

Central Banks and existing powers can outlaw or replace it. Bitcoin is still small, almost irrelevant, yet it has been driven down or outlawed in several places, for example North Korea, Venezuela, and New York. That’s right New York, you’re in proud company. North Korea outlaws everything and there is little internet access, so that’s no example. New York is simply regulating Bitcoin which creates business obstacles, but is still available via the few companies willing to do extensive paperwork. Venezuela, however, is actively suppressing Bitcoin which competes with the Bolivar, and is in fact seeking out and shutting down miners.

They do this on the premise that Bitcoin is consuming valuable (and free) national electric that could be better used powering a small town. Point taken. However, Bitcoin users are able to defend themselves against a terrible, lingering hyperinflation that is starving the nation to death, cutting off food, medicine, and services. Mining Bitcoin with national electric – or even having any – can be the difference between life or death. With Bitcoin, you can order food and medicine on Amazon. Without it, you can’t. So a ferocious national government has attempted to halt Bitcoin at gunpoint from both the users and the vendors. Like other currency oppressions, the USD in Zimbabwe for example, it hasn’t worked. Bitcoin is suppressed, but when the need for commerce is high enough, people make a way.

So maybe they will replace it with their own coin. Go ahead: this is a free market, freely competing. Banks already made a coin called Ripple, which trades in volume on exchanges, but is not open and public. If people choose it, I can’t stop them. Suppressing Bitcoin may make the incentives to choose the legal option far higher. But ultimately the point of Bitcoin is to be open, fair, and uncontrolled. A coin that is closed, controlled, and operated by some untrustworthy men has no incentive. But it can happen: people have chosen against their better interest before.

And that’s my real reservation. Suppose Bitcoin works. Suppose it replaces currency. Suppose it is adequately private. Suppose it can be made fast enough, cheap enough, and slim enough. Suppose the old system fades and we all get used to having our lives entirely on the Blockchain. Your every post is perfectly recorded and provably yours on Steemit. Your every photograph is saved and stamped to you. Every medical experience is indelibly written. Every purchase, every trade, it’s all on a blockchain somewhere. And even suppose it’s private. What then? I mean, isn’t this the system we had in 1900, under the former society and former gold standard? So what happened?

Being comfortable and familiar with Blockchain ledgers, taking them as for granted as Millennials do Facebook, and someone says, “Hey, rather than waste power on this inefficient, creaking system of writing everywhere for a fraction of the power the Federal Reserve Block can keep it for you. Think of the whales.” Sound silly? That’s exactly what they did in 1913, and again in 1933 – replace a direct, messy, competitive system with a more efficient one run by smarter men. The people didn’t protest then any more than they do now, so why would we expect them to in 2050 or 2070? No one cares about corruption and murder: we’re only moving to this system now because it’s better and cheaper. If the Fed Reserve Block is cheaper, won’t we move then?

 

I can’t solve the next generation’s problems. We’ll be lucky to survive our own. But I can warn you that even now this generation will never accept a digital mark without which you cannot buy or sell, not voluntarily and not by force. It’s too far to reach and social trust is too compromised. But could they get us halfway there and just make it official later, when everything’s fixed again? I think absolutely.

Once that’s in, you can finish all the plans written in the bank and government white papers: perfect, inescapable taxation. Perfect, indelible records of everyone you talked to, everything you said, everything you bought, everywhere you were, everyone you know. Not today, but in the future. And that is the purgatory or paradise they seek today. The price of Liberty is eternal vigilance. The system we have wasn’t always bad: a small cadre of bad men worked tirelessly while complacent citizens shirked their duty. So when we move to a new system softly, without real purge, real morality, real reform, what makes you think the same thing won’t happen to your new system? Only far, far more dangerous. But I can’t prevent that. Think, and plan accordingly.

 

 

Dec 102017
 
 December 10, 2017  Posted by at 2:33 pm Finance Tagged with: , , , , , , , , ,  13 Responses »
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Gustave Courbet Sunset on Lake Geneva 1876

 

 

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 4 is here: Bitcoin Doesn’t Exist – 4

Next up: all 5 chapters combined in one big essay.

 

 

Dr. D: Bitcoin can be stolen. Although “Bitcoin” can’t be hacked, it’s only software and has many vulnerabilities. If held on an exchange, you have legal and financial risk. If held at home, you could have a hard drive fail and lose your passwords. If it’s on a hardware fob like a Trezor, the circuits could fail. For a robust system, computers themselves are pretty fragile. You could write down your passwords on paper, and have a house fire. You could print out several copies, but if any of the copies are found, they have full access to your account and stolen without you knowing. You could have your passwords stolen by your family, or have a trojan take a screen or keystroke capture.

Hackers could find a vulnerability not in Bitcoin, but in Android or AppleOS, slowly load the virus on 10,000 devices, then steal 10,000 passwords and clear 10,000 accounts in an hour. There are so many things that can go wrong, not because of the software, but at the point where you interface with the software. Every vault has a door. The door is what makes a vault useful, but is also the vault’s weakness. This is no different than leaving blank checks around, losing your debit card, or leaving cash on your dashboard, but it’s not true that there are no drawbacks. However the risks are less obvious and more unfamiliar.

Bitcoin isn’t truly anonymous. If someone, the NSA, wanted to track your drug purchases on SilkRoad, they could follow the router traffic, they could steal or work out your keys, they could eventually identify your wallet, and from there have a perfect legal record of all your transactions. Defenders will say that wallets are anonymous, that like Swiss accounts, we have a number, but not a name, and you can create new numbers, new wallets endlessly at will. Fair enough, but if I can see the transfers from the old to the new, it can be tracked. If I can get your account number by any means, I can see the flows. To some extent it’s speculation because we don’t know what technology they have available to crack codes, to see into routers, Internet traffic and servers.

Could there be a hidden exploit not in “Bitcoin” but in AES256 or the Internet itself? Maybe. Are there secret code-breaking mainframes? Possibly. But given enough interest, we can be sure that they could always get a warrant and enter your house, hack your computer, and watch your keyboard. However, this is no different than cash. If necessary, they can already track every serial number of every bill as it leaves an ATM or a drug sting. Then you follow those serial numbers as they are deposited and reappear. I expect Bitcoin is not very different, and like cash, is only casually anonymous. But is this a problem with cash? Or with Bitcoin? Your intent as a citizen is to follow the law, pay your taxes, and not hurt others. If government or other power centers are willing to expend that much effort to track you, perhaps the problem should be addressed with proper oversight on warrants and privacy.

Bitcoin is slow and expensive. Very true. Bitcoin Core has gotten so outsized from its origins that it may soon cost $5 to buy a $1 coffee and 48 hours to confirm the purchase. That’s clearly not cheaper, faster, OR better. It’s worse: far, far worse. Nor can it improve. Since Blockchain writes the ledger, the longer the ledger, the bigger it is. Technically, it can only clear a few transactions per second. This problem may not doom it, but it would relegate it to only huge, slow transactions like moving container ships. That is, a form of digital gold note. We don’t actually ship gold or whatever to pay for transactions; it just sits in the background, an asset. Per Satoshi, Bitcoin is a “Digital Asset.”

 

And the core team seems to like this more secure, higher value direction, where these obstacles are acceptable. But without a larger, deeper market, it’s the plaything of billionaires and then who sets the price? It becomes another experiment, an antique. Luckily, the story doesn’t stop there. Because it’s only software, you can always change it if you can convince the participants to use the new version. Bitcoin Cash is a fork that it larger, faster, and cheaper, reducing the limitations for now. And it can become Segwit2 or Cash2 later if the community agrees. But by design Bitcoin is not meant to be instant nor free, and probably never will be. Like gold, it is meant to be expensive, vaulted, and rarely moved. If you want fast and cheap, LiteCoin, Dash, and many others are vying to be the digital silver or digital payment card. That’s not very different from the gold standard, or even payments today.

Bitcoin is a huge electric and Internet drain. This is true. However, it’s also misrepresented. What is the electric overhead of every bank, every terminal, every mainframe on the NYSE, every point-of-sale card machine, every cash register and router in retail? Don’t we use an awful lot of electric to keep those running? What about their cost, the repairmen, the creation of new systems every year from mine to market, from idea to update release, to replace them? We also personally have our computers and routers, the whole Internet on and idling. What’s the base cost? Is it fair to compare as if it were a pasture before Bitcoin arrived?

We built the existing system this way because it gained efficiency. Time in the clearing, price in not running typewriters and mail worldwide, and of course taxes. We’re talking about creating a parallel financial system here. If the old one is replaced, is the new one better, or worse? Mining takes a lot of power, but the math in Bitcoin is meant to get increasingly harder to compensate for increasing computer speed. The computers are supposed to be on to confirm transactions. That means that the more people use it, the more power consumed, but that’s true of everything. The more people that drive cars, the more gas is used. So is the car doing something useful and being used well? Is it replacing a less efficient horse, or just wasting energy better used elsewhere? These are complex questions.

At the least, Bitcoin uses far, far too much energy in the design, and because of the speculation, far too many people are mining it without using it. However, all of the subsequent coins were concerned about this, and their power consumption is far, far less. As Bitcoin is near its hardest stage and stops at 22 Million, power consumption is near peak, but should stabilize, or even fork to a low-energy proof-of-stake model. As Bitcoin is not well-suited to worldwide transactions, it should be replaced with less-power intensive alternatives, and because of this, may get smaller. And if it replaces some of the existing system, it can generate an offset. But yes, if it uses too much power, is too inefficient by design, it will be too expensive, abandoned, and fail.

 

Are Cryptos a scam? Probably not: we pointed out some legitimate uses above for both coins and tokens. But there’s one coin that arguably is a Ponzi, a dozen coins that are scams, scores that are terrible ideas like Pets.com and will fail, and another dozen good, well-meaning tokens that are honest but ultimately won’t succeed. Yet, like the .Com 90’s, there are probably some like Apple that rise far more than it seems they should, and by surviving, effectively give 16% compounded returns for 40 years, front-loaded. That’s the nature of business. But are many coins and tokens open scams that run off with your money? Yes. Are others worthless? Yes. It’s also true of the stock and bond market and can’t be helped. Buyer beware.

Is Bitcoin a Ponzi? It’s not a Ponzi by definition because there is no central thief, nor are new investors paying off old investors. So is it a fraud, misrepresenting a few hours of electricity as worth $10,000? Well, that depends on what you think its value is. Is it providing value, a service? If so, what is that service worth to you? We already said it has the operational elements of money, with the addition of being extremely transmissible and transportable. If that has value to you, fine, if not, perhaps gold or bonds are more appropriate. But that’s the problem of what gives Bitcoin value.

A stock or bond you can look at the underlying asset, the profit or income flows, the book value. But Canadian or New Zealand dollars? What gives them value? They’re also backed by nothing. What gives gold value? It has no income, just popularity. Likewise Bitcoin: what gives it value is that other people want it. If they stop wanting it, it has no value, but that’s psychological and can’t be directly measured. With that in mind, is its fair value $1K or $1B? No one knows. Can its value fall from $10k to $5k? Yes, and it has many times. Only the market, that is, we can decide what it’s worth to us, and the market is small and immature, with no price history and prone to wild swings.

Shouldn’t the exchanges set the price? Yes, and they do, but how is that accomplished? We already said the Exchanges do internal trading off-ledger, outside Bitcoin. So aren’t they setting the price on the exchange instead of the people setting the price peer-to-peer? It would seem so. So aren’t they subject to market manipulation? Although at the moment they have a fairer design, and smaller pipelines to the larger market of money, yes. So if they launch a Bitcoin future, a tracker, a triple-short ETF, internally inflate their holdings, wouldn’t that make it subject to corruption and thus back into the existing system?

No one knows: it’s never been done before. I suspect not, but only because the people want Bitcoin specifically because it is Outside-system, Anti-fraud and watch these things carefully. But it’s run by humans and reflect human nature: that means over time some new form of exchange and corruption can grow up around it as before. While the ability to rig Bitcoin is limited because the quantity of Bitcoin is limited and riggers must first buy Bitcoin fairly, the Exchanges and the price-setting are an issue, and especially into the future.

 

Central Banks and existing powers can outlaw or replace it. Bitcoin is still small, almost irrelevant, yet it has been driven down or outlawed in several places, for example North Korea, Venezuela, and New York. That’s right New York, you’re in proud company. North Korea outlaws everything and there is little internet access, so that’s no example. New York is simply regulating Bitcoin which creates business obstacles, but is still available via the few companies willing to do extensive paperwork. Venezuela, however, is actively suppressing Bitcoin which competes with the Bolivar, and is in fact seeking out and shutting down miners.

They do this on the premise that Bitcoin is consuming valuable (and free) national electric that could be better used powering a small town. Point taken. However, Bitcoin users are able to defend themselves against a terrible, lingering hyperinflation that is starving the nation to death, cutting off food, medicine, and services. Mining Bitcoin with national electric – or even having any – can be the difference between life or death. With Bitcoin, you can order food and medicine on Amazon. Without it, you can’t. So a ferocious national government has attempted to halt Bitcoin at gunpoint from both the users and the vendors. Like other currency oppressions, the USD in Zimbabwe for example, it hasn’t worked. Bitcoin is suppressed, but when the need for commerce is high enough, people make a way.

So maybe they will replace it with their own coin. Go ahead: this is a free market, freely competing. Banks already made a coin called Ripple, which trades in volume on exchanges, but is not open and public. If people choose it, I can’t stop them. Suppressing Bitcoin may make the incentives to choose the legal option far higher. But ultimately the point of Bitcoin is to be open, fair, and uncontrolled. A coin that is closed, controlled, and operated by some untrustworthy men has no incentive. But it can happen: people have chosen against their better interest before.

And that’s my real reservation. Suppose Bitcoin works. Suppose it replaces currency. Suppose it is adequately private. Suppose can be made fast enough, cheap enough, and slim enough. Suppose the old system fades and we all get used to having our lives entirely on the Blockchain. Your every post is perfectly recorded and provably yours on Steemit. Your every photograph is saved and stamped to you. Every medical experience is indelibly written. Every purchase, every trade, it’s all on a blockchain somewhere. And even suppose it’s private. What then? I mean, isn’t this the system we had in 1900, under the former society and former gold standard? So what happened?

Being comfortable and familiar with Blockchain ledgers, taking them as for granted as Millennials do Facebook, and someone says, “Hey, rather than waste power on this inefficient, creaking system of writing everywhere for a fraction of the power the Federal Reserve Block can keep it for you. Think of the whales.” Sound silly? That’s exactly what they did in 1913, and again in 1933 – replace a direct, messy, competitive system with a more efficient one run by smarter men. The people didn’t protest then any more than they do now, so why would we expect them to in 2050 or 2070? No one cares about corruption and murder: we’re only moving to this system now because it’s better and cheaper. If the Fed Reserve Block is cheaper, won’t we move then?

 

I can’t solve the next generation’s problems. We’ll be lucky to survive our own. But I can warn you that even now this generation will never accept a digital mark without which you cannot buy or sell, not voluntarily and not by force. It’s too far to reach and social trust is too compromised. But could they get us halfway there and just make it official later, when everything’s fixed again? I think absolutely.

Once that’s in, you can finish all the plans written in the bank and government white papers: perfect, inescapable taxation. Perfect, indelible records of everyone you talked to, everything you said, everything you bought, everywhere you were, everyone you know. Not today, but in the future. And that is the purgatory or paradise they seek today. The price of Liberty is eternal vigilance. The system we have wasn’t always bad: a small cadre of bad men worked tirelessly while complacent citizens shirked their duty. So when we move to a new system softly, without real purge, real morality, real reform, what makes you think the same thing won’t happen to your new system? Only far, far more dangerous. But I can’t prevent that. Think, and plan accordingly.

 

 

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 4 is here: Bitcoin Doesn’t Exist – 4

Next up: all 5 chapters combined in one big essay.

 

 

Dec 092017
 
 December 9, 2017  Posted by at 12:44 pm Finance Tagged with: , , , , , , , , ,  5 Responses »
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Gustave Courbet The wave 1871

 

 

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 5 will follow shortly. And after that, all 5 chapters combined in one big essay.

 

 

Dr. D: Well, all parts of the system rely on accurate record-keeping. Look at voting rights: we had a security company where 20% more people voted than there were shares. Think you could direct corporate, even national power that way? Without records of transfer, how do you know you own it? Morgan transferred a stock to Schwab but forgot to clear it. Doesn’t that mean it’s listed in both Morgan and Schwab? In fact, didn’t you just double-count and double-value that share? Suppose you fail to clear just a few each day. Before long, compounding the double ownership leads to pension funds owning 2% fake shares, then 5%, then 10%, until stock market and the national value itself becomes unreal. And how would you unwind it?

Work backwards to 1999 where the original drop happened? Remove 10% of CALPERs or Chicago’s already devastated pension money? How about the GDP and national assets that 10% represents? Do you tell Sachs they now need to raise $100B more in capital reserves because they didn’t have the assets they thought they have? Think I’m exaggerating? There have been several companies who tired of these games and took themselves back private, buying up every share…only to find their stock trading briskly the next morning. When that can happen without even a comment, you know fraud knows no bounds, a story Financial Sense called “The Crime of the Century.” No one blinked.

But it doesn’t stop there. You don’t only buy stocks, you sell them. And you can sell them by borrowing them from a shareholder. But what if there’s no record of delivery? You can short or sell a stock without owning any. And the more you sell, the more it drives the price down and the more money you make. In fact, profits are infinite if you can sell enough that the company goes bankrupt: you never have to repay the stock at all. And this “naked” short selling can only occur if there’s openly bad recording and enough failures-to-deliver to hide it. You could literally own nothing, borrow nothing, post nothing, and with no more than insider access to an exchange, drive a company out of business. That’s how crucial recording is.

And while for appearance’s sake, they only attack and destroy small plausibly weak stocks, Overstock.com with a $1.45B market cap fought these naked short sellers for years. Publicly, openly, vocally, with the SEC. Besides eroding their capital, besides their legal fees, besides that e.g. Amazon could pay to have their competition run out of business with fraudulent shorting, the unlimited incentive to short instead of long on small companies could suppress the entire stock market, indeed the national wealth and GDP. It may account for some of the small caps underperforming their potential for years, and why an outsized portion of stock value to be in just the 5 protected FAANG or DOW 30 stocks. …We don’t know, because we have no honesty, no accounting, and nothing to compare it to. But no one cares, because it’s been going on for 20 years, and if they cared, they’d do something about it. Again, no one cares about your problems, only your solutions. Even if the nation falls.

 

Look at it from their point of view: if you’re a business owner, now you can’t rationally list your corporation. Your stock could be manipulated; your business could be bankrupted for no reason at all. We’ve seen the NYSE shrink as businesses start to list in more honest jurisdictions, and even Presidents can’t convince them to come back. Traders and Fund Managers retire in public interviews, telling the world there is no longer any sense or price discovery, and therefore there is market madness.

Yet we just said that to clean up the market would discover 10%, 20%, 40% fake shares, fake business values, fake pension values, therefore fake GDP values, and fake GDP to Debt ratios, and therefore would perhaps lead to an accurate Debt to GDP of 140%, which would crash the U.S. dollar and possibly the nation. Would a complete U.S. financial collapse lead to a nuclear war? And it all goes back to fraud we didn’t stop 20 years ago. How do you solve the problem? The only way out without collapse is to build an honest system parallel to the existing system and slowly transfer assets from the rotten, sinking ship to the new one. The captains of the old ship may not like it, but look at the incentives. No one can tolerate the old ship except the pirate captain; even the crew, the stock traders, don’t want or control it any more.

However, what if you created an honest stock market Blockchain that actually had the stock certificates and actually transferred them, cheaply and reliably without false duplication? This is what is happening in the Jamaican Stock Market. A new company can choose to list on the stock Blockchain and avoid the old system. Other companies or even the whole exchange can clean up the books, slowly, stock by stock, and move it to the new honest system. Because they’re honest? No way! No one cares about truth or honesty, clearly. Because they can sell their stock exchange as superior, solving the existing problems. Stopping fraud, theft, the stealing or crippling of companies, fake voting, depression of Main Street and outsiders in favor of Wall Street and insiders, this is what Blockchain can do. In short, it would work better, cheaper.

What else can Blockchain do?

Blockchain is just software written by programmers so it’s as versatile as any other software. So why not program things into it with a “Smart Contract”? Suppose you make a bet: IF the Packers beat the Lions on November 12, 2017, THEN I will pay you $50. You set up the contract, and the bot itself can look for the headlines and transfer the money when the conditions are met.

That’s pointless but how about this: You run a jewelry business on Etsy and need to buy $500 in beads from Hong Kong. Normally, you would need to pay an importer, a currency exchange, bank account, tire transfer, escrow account, and a lawyer, or their proxies within the system, plus two weeks’ clearing time. That’s a lot of overhead for a small transaction. In contrast, a smart contract such as Ethereum could post the value of the coin (escrow), and when Long Beach or FedEx confirms delivery, releases the Ethereum, a coin of value, to the seller in Hong Kong. Instantly. Why? The existing financial system is charging too much and doing too little. That’s a huge incentive to get around their slow, overpriced monopoly.

 

Once you cut the costs, have a more direct method, and reduce the time to minutes, not weeks, the choice is obvious, which may explain why Microsoft, Intel, and others are deep in ETH development. Why overpay for bad service, and support the overpriced bonuses of men who will use their power to turn on or shut off your livelihood at will? Blockchain costs less and does more. Being just software, there are many other software products serving hundreds of other business plans. These use-coins are generally called “Tokens”, whereas“Coins” are meant to be pure currencies. There are Tokens for a wide variety of business purposes: online gambling? Yes. Tokens to buy marijuana in certain states? Sure.

But how about a Token like Populous that contains the credit information of small businesses worldwide, so you can make modest income lending against their accounts receivable? You get more income, business worldwide gets better service and lower costs. Why? The existing financial system is charging too much and doing too little. How about a Token like Salt for personal loans and perfecting collateral? They will lend cash against your Cryptocurrencies, because if your loan falls short, they can sell your collateral instantly. No foreclosures, no repossessions, no overhead.

This is what banks do when they hold your savings and checking accounts, yet sell you a personal loan. But the banks are giving you no interest on savings, while charging origination fees and high interest. They’re charging too much and doing too little. Well, you say, this sounds too good to be true: a parallel system to replace our existing corrupt, broken, overpriced one. One that doesn’t have to confront existing power or reform the system, but beyond price appreciation has its own incentives to join? Surely there are problems.

Oh, yes. So many problems. The first is often mentioned: it’s fine that Bitcoin is a finite commodity with only 22M coins, and if Bitcoin were the only coin, that would work. But there are over 1,000 coins now, and more every day. Isn’t that just another avenue to unlimited issuance and inflation by unlimited, unregistered people? Well, yes and no. It’s true that anyone can start their own Bitcoin – Litecoin for example is a faster duplicate of Bitcoin – but it’s also true that anyone can start their own Facebook. MySpace certainly did.

 

So why don’t they? Basically because of financial inertia, the Network Effect, a coin you start and only you use is worthless. The value is in the belief that other people will use it. Without that, you’re banished to MySpace Siberia. Still, with a 1,000 coins, don’t they all compete? Yes, and that’s a good thing, not bad. This is no different than the competing Bank Notes of the 19th century. If you like this bank and believe in them, you prefer their notes to others. Or you might use one note in Missouri and another in Louisiana. So with Cryptos. You might choose Bitcoin, with slow traffic and high costs to pay for a house. But you would choose Litecoin to pay for coffee.

You already do this, no different than using cash to buy a hot dog, your debit card for groceries, and a bank transfer for a car. It’s overlooked because they’re all called “dollars,” but they’re not. One is currency, one is a short-term credit, and one is a banking ledger. Because of the Network Effect, you can’t have 1,000 equal coins and have them all work. The market will prefer some over others until there are only a few, just as AskJeeves and Infoseek gave way to Google, which may someday give way to someone else. Just as you can’t start a new Google today, there are only a few top coins, easily updated, and little space for new coins.

In addition, the “1,000 coins” are not actually coins. Most of the new coins are Tokens, which are not “currencies” like Bitcoin and a means of exchange, but business models and services. Like Bank Notes, the market is self-limiting, but evolving. But if there are a variety of coins, and like Litecoin they can suddenly appear and change, what reassurance do you have that your Bitcoin “money” is worth anything? Like 19th century Bank Notes or AskJeeves, your responsibility is to be aware of the market and the changing values and react accordingly. And in a mature market, “everyone knows” the histories and reputations, but in a young market, like Dell and Gateway in 1992, no one knows. But that’s also why there is more profit now as well as more risk. But we’re also watching volatility and risk in Pounds, Lira, Gold, or even outright defaults like Argentine Pesos or Rubles. We already carry that risk, but it’s familiar and taken for granted.

If coins can just “change” and “fork” whenever they want, then isn’t it like buying Australian Dollars, then waking up and finding they’re Yen? Yes and no. Like other cryptos, Bitcoin is just software written by men. So a group of developers may think Bitcoin should remain the same while the old team thinks it should be improved so much that they do the work, write the updates, and release it. Well you have a “fork”, but what happens next is the Network Effect. So you’re a miner and a user of Bitcoin. You now have a choice: do you use the new software, the old software, or both? Everyone expected one to be adopted, and the old one to wither into oblivion. Since a Fork gives you one unit of each, the eventual outcome was a wash within the user group. But that doesn’t seem to be happening.

Ethereum forked, and Ethereum Classic still exists, and trades steadily but far less. Bitcoin Cash Forked and although 1/10th the price, both are trading briskly. No one knows what will happen, because it’s never existed before. So yes, you could wake up and find you don’t like what Bitcoin decided to do, just as you could wake up and not like your new bank manager or CFO of Dell, and then you sell that asset and choose another. That’s your responsibility. That’s competition.

Besides unexpectedly finding both forks have value, there is an upside to the downside. If some new advance in speed or encryption appears in Litecoin or Dash, Bitcoin can also adopt it. This not only improves the market, but reduces sudden upsets as new advances shouldn’t unseat popular coins but are adopted by them. Indeed, this was the purpose of Bitcoin Cash fork: to improve speed and cost. Yet now they both exist for different purposes in the market. Another objection is that cryptos depend on electricity and an expensive, functioning Internet. True. But while I’m no fan of technology, which is full of problems, so does everything else. Without electricity, the western world would stop, with no water, no heat, and no light.

Without Internet, our just-in-time inventory halts, food and parts stop moving, banking and commerce fail. You’re talking Mad Max. TEOTWAWKI. That’s a grave problem, but not unique to Bitcoin.

 

 

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 3 is here: Bitcoin Doesn’t Exist – 3

Chapter 5 will follow shortly. And after that, all 5 chapters combined in one big essay.

 

 

Dec 072017
 
 December 7, 2017  Posted by at 12:25 pm Finance Tagged with: , , , , , , , , ,  15 Responses »
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Gustave Courbet The wave 1870

 

 

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 4 will follow shortly.

 

 

Dr. D: The money, the unaccountable, uninhibited release of tokens can do more than just buy centuries of hard labor in seconds, it‘s also a method of control. Banks, our present issuers of money, can approve or destroy businesses by denying loans. They can do this to individuals, like denying loans to unpopular figures, or to whole sectors, like gun shops. They can also offer money for free to Amazon, Facebook, and Tesla, which have no profitable business model or any hope of getting one, and deny loans to power plants, railroads, farms, and bridges as they fall into the Mississippi.

The result is banks and their attending insiders are a de facto Committee of Central Planners in the great Soviet style. What is fashionable and exciting to them can happen, and what they dislike or disapprove of for any reason can never happen. And once on a completely fiat system, this is how capital is allocated through our entire system: badly. What’s worse has been a 20-year turn toward Disaster Capitalism, whereby loans are extended to a business, sector, person, or nation, and then suddenly cut off, leading to the rapid foreclosure and confiscation of companies, assets, or continents by the “Development Team.”

Imagine a Bitcoin where Satoshi could erase your coins in your wallet for giving him a bad haircut. Or because he likes your wife. Nor is there any help for independent nations like Iran, or even nuclear powers like Russia. Both have been cut off, their funds suspended at a whim with no recourse. Even being a fellow insider is no insurance, as the NY banks cut off Lehman from funds they were owed, driving it into bankruptcy to buy the pieces in receivership. Unpopular Billionaires are treated likewise. This is a system with no justice, no order, no rules, and no predictability. Anyone within it is at grave and total risk. And yet before Bitcoin it was the only system we had, short of returning to the 19th century, it was the only way for modern commerce to deliver food, water, power, or function at all.

This is seen in its abuses, but also by its effects. The present system not only controls whether you are a winner or loser, whether you may go or stay, whether you may live or die, but also tracks every purchase, every location, in effect, every action throughout your entire life. These records will describe what books you read, what movies you watch, what associates you have, in real time Already these daily actions are being approved or denied. Take out a variable-rate jumbo loan? We’ll give you 110% of the value, paying you to be irresponsible (we’ll foreclose later). Want to buy gas when driving through Cheyenne 3:30 at night? Sorry, we disabled your card as a suspicious transaction. Sorry about you dying there of crime or of cold; we didn’t know and didn’t care. All your base are belong to us.

 

You say you don’t care if JP Morgan has your pay stubs to disturbing porn sites and Uber purchases to see your mistress? Well the future Mayor of Atlanta will, and he hasn’t graduated college yet. With those records it’s child’s play to blackmail policemen, reporters, judges, senators, or generals, even Presidents. And all those future Presidents are making those purchases right now, the ones that can be spun into political hay, real or unreal. So if you don’t worry what everyone knows about you, that’s fine, but imagine reading the open bank records, the life histories of every political opponent from now until doomsday. Then Don’t. Do. It. The people who have those records – not you – then have not just all the assets, not just all the money, but all the power and influence. Forever.

Are you signing up for that? Bitcoin doesn’t. Bitcoin doesn’t care who you are and with some care can make it very difficult to track you. And without tracking you, it makes it impossible to boycott you. And without a central repository, it’s impossible to march in with tanks and make them give you the records, turn money on or off, to make other people live or die and bend to your will by violence.

No one will care about that, because no one cares about it now unless, like Russia or China, it’s directed at them personally and then it’s too late. The real adoption of Bitcoin is far more mundane.

The long-term interest rate is 5%. Historically banks would lend at 8%, pay at 4%, and be on the golf course by 5. No one thought much about it because like a public utility, banking was a slow, boring affair of letting business do business. You know, farming, mining, manufacturing, all that stuff we no longer do. For decades, centuries even, banking was 5%-15% of a nation’s GDP, facilitating borrowers and lenders and timescales, paying for themselves with the business efficiencies they engender.

 

 

 

 

All that changed after WWII. Banks rose in proportion to the rest of the economy, passing the average, then the previous high, then when that level reached “Irrational Exuberance”, Greenspan started the printing presses, free money was created, and Senators and Presidents whose bank records were visible suddenly repealed Glass-Steagall. An economy stretched to breaking with free, centrally-allocated and misallocated money crashed and shrank, yet the banks– now known as the FIRE stocks: Finance, Insurance, and Real Estate – kept growing. How can banks and finance keep growing with a shrinking economy? By selling their only product: debt.

How do you sell it? Reduce the qualifications past zero to NINJA-levels, and use your free money to FORCE people to take it via government deficits and subsidized loans. No normal economy could do this. No normal business model could do this. Only a business now based on nothing, issuing nothing, with no restraint and no oversight. And the FIRE sector kept growing, through 15%, 20%, 25% until today most of U.S. GDP is either Finance selling the same instruments back and forth by borrowing new money or GDP created by governments borrowing and spending.

Remember when we started, banks paid 4% and charged at 8%. Now they openly take savings with negative interest rates, and charge at 30% or higher on a credit card balance averaging $16,000. And still claim they need bailouts comprising trillions a year because they don’t make money. The sector that once facilitated trade by absorbing 5% of GDP is now 5x larger. There’s a word for a body whose one organ has grown 5x larger: Cancer. Unstopped, it kills the host.

 

What does this have to do with Bitcoin? Simple. They’re charging too much. They’re making too much both personally and as a group. They’re overpriced. And anything that’s overpriced is ripe for competition. And the higher the markup, the more incentive, the more pressure, the more profit there is to join the upstart. Bitcoin can economize banking because what does banking do? It saves money safely, which Bitcoin can do. It transfers money on demand, which Bitcoin can do. It pays you interest, which mining or appreciation can do.

It also can lend, register stocks and ownership, rate credit risks, and allocate capital which other non-Bitcoin Tokens can do. In short, it can replace the 25% overpricing of the financial sector. If it could reduce the overhead of outsized profit, the misuse of expensive brainpower, of Wall Street and London office space, and reduce financial costs to merely 10% GDP, it could free up 20% of GDP for productive purposes. Why did you think Detroit and Baltimore fell in on themselves while N.Y. and D.C. boomed? That’s the 30% they took, $4B a year, from every other state, every year for 40 years.

That money and that brainpower could be much better allocated elsewhere, but so long as the Finance sector can print free money and buy free influence, they will never stop on their own. Only an upstart to their monopoly can cure the cancer and bring them back to a healthy size and purpose. Bitcoin can do this only because they charge too much and do too little. Of course, they could go back to paying 4% and charging 8% with a CEO:employee pay ratio of 20:1 but history says it will never happen. Only a conflict, a collapse, or competition can reform them, and however long it takes, competition is by far the best option.

 

 

So why would people pick Bitcoin? It costs less and does more. Amongst adopters, it’s simpler and more direct. It pays the right people and not the wrong ones. It rewards good behavior instead of bad, and can help producers instead of parasites. It’s equitable instead of hierarchical. What else? While not Bitcoin proper, as a truth machine Blockchain technology is the prime cure for the present system’s main problem: fraud. There is so much fraud at the moment, libraries of books have been written merely recording the highlights of fraud since 2001. But merely recording the epic, world-wide, multi-trillion dollar frauds clearly does not cure it. Like other human problems, no one cares about your problems, only your solutions, and Blockchain has the solution.

While the details of fraud are complex, the essence of fraud is quite simple: you lie about something in order to steal it. That’s it. It could be small or large, simple or complex, but basically fraud is all about claiming what didn’t happen. However, the Blockchain is all about truth, that is, creating consensus about what happened, and then preserving it. Take the Robosigning scandal: accidental or deliberate, the mortgage brokers, banks, and MBS funds lost the paperwork for millions of houses. A house could be paid off could be foreclosed, as happened, or it could be owned 5 times, as happened. Like the Sneeches, no one knew which one was who, and the only certainty was that the official authority – county courthouses – did not know because to register there would have cost Wall Street and inconvenient millions or billions in shared tax stamps.

The system broke down, and to this day no one has attempted to define ownership, choosing instead to usher all the questionable (and therefore worthless) material into the central bank and hiding it there until the mortgage terms expire, forcing the taxpayers to bail out a multi-trillion dollar bank fraud at full value. And this is just one messy example. The S&L crisis was not dissimilar, nor are we accounting for constant overhead of fees, mortgage transfers, re-surveys, and title searches nationwide.

 

With Blockchain it’s simple: you take line one, write the information, the owner, title, date, and transfer, and share it with a group. They confirm it and add mortgage #2, then #3 and so on. It’s a public ledger like the courthouse, but the system pays the fees. It also can’t be tampered with, as everyone has a copy and there is no central place to bribe, steal, and subvert as happened in 2006 but also in history like the 1930s or the railroad and mining boom of the 1800s. If there are questions, you refer to the consensus If it’s transferred, it is transferred on the ledger. If it isn’t on the ledger, it isn’t transferred, same as the courthouse. Essentially, that’s what “ownership” is: the consensus that you own something. Therefore you do not have a mortgage due disappear, or 4 different owners clamoring to get paid or take possession of the same property, or the financial terrorism of shattering the system if you even attempt to prosecute fraud.

It’s not just mortgages: stocks have the same problem. Since the digital age began, the problem of clearing stock trades has steadily increased. Eventually, the NYSE trading volume was so large they couldn’t clear at all, and the SEC let trading houses net their internal trades, only rectifying the mismatches between brokerages. Eventually, that was too large, and they created the DTCC as a central holder and clearing house. Yet, in an age of online trading and high-frequency trading mainframes, it became apparent there was no way to clear even residual trades, and they effectively no longer try, and the SEC, instead of forcing them to compliance, lets them. There are 300M failed stock trades a day and $50B a day in bond failures, or $12 Trillion year in bonds alone. And so? If you sell your stocks and bonds, the brokerage makes it come out whole, so what?

 

 

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1 .

Chapter 2 is here: Bitcoin Doesn’t Exist – 2

Chapter 4 will follow shortly.

 

 

Dec 062017
 
 December 6, 2017  Posted by at 12:24 pm Finance Tagged with: , , , , , , , , ,  11 Responses »
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Gustave Courbet The wave 1870

 

 

Chapter 1 of this five-part series by Dr. D is here: Bitcoin Doesn’t Exist – 1

Chapter 3 will follow shortly.

 

 

Dr. D: You have to understand what exchanges are and are not. An exchange is a central point where owners post collateral and thereby join and trade on the exchange. The exchange backs the trades with their solvency and reputation, but it’s not a barter system, and it’s not free: the exchange has to make money too. Look at the Comex, which reaches back to the early history of commodities exchange which was founded to match buyers of say, wheat, like General Mills, with producers, the farmers. But why not just have the farmer drive to the local silo and sell there? Two reasons: one, unlike manufacturing, harvests are lumpy. To have everyone buy or sell at one time of the year would cripple the demand for money in that season. This may be why market crashes happen historically at harvest when the demand for money (i.e. Deflation) was highest. Secondly, however, suppose the weather turned bad: all farmers would be ruined simultaneously.

Suppose the weather then recovered: the previous low prices are erased and any who delayed selling would be rich. This sort of random, uncontrolled, uninsurable event is no way to run an economy, so they added a small group of speculators into the middle. You could sell wheat today for delivery in June, and the buyer would lock in a price. This had the effect of moderating prices, insuring both buyers AND sellers, at the small cost of paying the traders and speculators for their time, basically providing insurance. But the exchange is neither buyer, seller, nor speculator. They only keep the doors open to trade and vet the participants. What’s not immediately apparent is these Contracts of Wheat are only wheat promises, not wheat itself. Although amounts vary, almost all commodities trade contracts in excess of what is actually delivered, and what may exist on earth. I mean the wheat they’re selling, millions of tons, haven’t even been planted yet. So they are synthetic wheat, fantasy wheat that the exchange is selling.

A Bitcoin exchange is the same thing. You post your Bitcoin to the exchange, and trade it within the exchange with other customers like you. But none of the Bitcoin you trade on the exchange is yours, just like none of the wheat traded is actual wheat moving on trucks between silos. They are Bitcoin vouchers, Bitcoin PROMISES, not actual Bitcoin. So? So although prices are being set on the exchanges – slightly different prices in each one – none of the transfers are recorded on the actual Bitcoin Ledger. So how do you think exchanges stay open? Like Brokers and Banks, they take in the Bitcoin at say 100 units, but claim within themselves to have 104.

 

Why? Like any other fractional reserve system, they know that at any given moment 104 users will not demand delivery. This is their “float” and their profit, which they need to have, and this works well as far as it goes. However, it leads to the problem at Mt. Gox, and indeed Bear Sterns, Lehman and DeutscheBank: a sudden lack of confidence will always lead to a collapse, leaving a number of claims unfulfilled. That’s the bank run you know so well from Mary Poppins’ “Fidelity Fiduciary Bank”. It is suspected to be particularly bad in the case of Mt. Gox, which was unregulated. How unregulated? Well, not only were there zero laws concerning Bitcoin, but MTGOX actually stands for “Magic The Gathering Online eXchange”; that is, they were traders of comic books and Pokemon cards, not a brokerage. Prepare accordingly.

The important thing here is that an exchange is not Bitcoin. On an exchange, you own a claim on Bitcoin, through the legal entity of the exchange, subject only to jurisdiction and bankruptcy law. You do not own Bitcoin. But maybe Mt.Gox didn’t inflate their holdings but was indeed hacked? Yes, as an exchange, they can be hacked. Now you only need infiltrate one central point to gain access to millions of coins and although their security is far better, it’s now worth a hacker’s time. Arguably, most coins are held on an exchange, which is one reason for the incredibly skewed numbers regarding Bitcoin concentration. Just remember, if you don’t hold it, you don’t own it. In a hack, your coins are gone.

If the exchange is lying or gets in trouble, your coins are gone. If someone is embezzling, your coins are gone. If the Government stops the exchange, your coins are gone. If the economy cracks, the exchange will be cash-strapped and your coins are frozen and/or gone. None of these are true if YOU own your coins in a true peer-to-peer manner, but few do. But this is also true of paper dollars, gold bars, safe deposit boxes, and everything else of value. This accounts for some of the variety of opinions on the safety of Bitcoin. So if Polinex or Coinbase gets “hacked” it doesn’t mean “Bitcoin” was hacked any more than if the Comex or MF Global fails, that corn or Yen were “hacked”. The exchange is not Bitcoin: it’s the exchange. There are exchange risks and Bitcoin risks. Being a ledger Bitcoin is wide open and public. How would you hack it? You already have it. And so does everybody else.

So we’ve covered the main aspects of Bitcoin and why it is eligible to be money. Classically, money has these things:

1. Durable- the medium of exchange must not weather, rot, fall apart, or become unusable.

2. Portable- relative to its size, it must be easily movable and hold a large amount of value.

3. Divisible- it should be relatively easy to divide with all parts identical.

4. Intrinsically Valuable- should be valuable in itself and its value should be independent of any other object. Essentially, the item must be rare.

5. Money is a “Unit of Account”, that is, people measure other things, time and value, using the units of value to THINK about the world, and thus is an part of psychology. Strangely that makes this both the weakest and strongest aspect of:

6. “The Network Effect”. Its social and monetary inertia. That is, it’s money to you because you believe other people will accept it in exchange.

The Score:

1. Bitcoin is durable and anti-fragile. As long as there is an Internet – or even without one – it can continue to exist without decay, written on a clay tablet with a stylus.

2. Bitcoin is more portable than anything on earth. A single number — which can be memorized – can transport $160B across a border with only your mind, or across the world on the Internet. Its portability is not subject to any inspection or confiscation, unlike silver, gold, or diamonds.

3. Bitcoin is not infinitely divisible, but neither is gold or silver, which have a discrete number of atoms. At the moment the smallest Bitcoin denomination or “Satoshi” is 0.00000001 Bitcoin or about a millionth of a penny. That’s pretty small, but with a software change it can become smaller. In that way, Bitcoin, subject only to math is MORE divisible than silver or gold, and far easier. As numbers all Bitcoin are exactly the same.

4. Bitcoin has intrinsic value. Actually, the problem is NOTHING has “intrinsic” value. Things have value only because they are useful to yourself personally or because someone else wants them. Water is valuable on a desert island and gold is worthless. In fact, gold has few uses and is fundamentally a rock we dig up from one hole to bury in another, yet we say it has “intrinsic” value – which is good as Number 4 said it had to be unrelated to any other object, i.e. useless. Bitcoin and Gold are certainly useless. Like gold, Bitcoin may not have “Intrinsic value” but it DOES have intrinsic cost, that is, the cost in time and energy it took to mine it. Like gold, Bitcoin has a cost to mine measurable in BTU’s. As nothing has value outside of human action, you can’t say the electric cost in dollars is a price-floor, but suggests a floor, and that would be equally true of gold, silver, copper, etc. In fact, Bitcoin is more rare than Rhodium: we mine rare metals at 2%/year while the number of Bitcoins stops at 22 Million. Strangely, due to math, computer digits are made harder to get and have than real things.

5. Bitcoin is a unit of account. As a psychological effect, it’s difficult to quantify. Which comes first, the use of a thing, or its pricing? Neither, they grow together as one replaces another, side-by-side. This happened when gold replaced iron or salt or when bank notes replaced physical gold, or even when the U.S. moved from Pounds and Pence to Dollars and Cents. At first it was adopted by a few, but managed to get a critical mass, accepted, and eventually adopted by the population and entirely forgotten. At the moment Bitcoin enthusiasts do in fact mentally price things in Bitcoins, especially on exchanges where cross-crypto prices are marked vs BTC. Some never use their home currency at all, living entirely according to crypto-prices until home conversion at the moment of sale, or as hundreds or thousands of businesses are now accepting cryptocurrencies, even beyond. For them it is a unit of account the way Fahrenheit is a unit within the United States.

6. Bitcoin has the network effect. That is, it is widely accepted and publicly considered money. It’s in the news, has a wide following worldwide, and exchanges are signing up 40,000 new users a month. It’s accepted by thousands of vendors and can be used for purchases at Microsoft, Tesla, PayPal, Overstock, or with some work, Amazon. It’s translatable through point-of-sale vendor Square, and from many debit card providers such as Shift. At this point it is already very close to being money, i.e. a commonly accepted good. Note that without special arrangements none of these vendors will accept silver coins, nor price products in them. I expect if Mark Dice offered a candy bar, a silver bar, or a Bitcoin barcode, more people would pick the Bitcoin. In that way Bitcoin is more money than gold and silver are. You could say the same thing about Canadian Dollars or Thai Bhat: they’re respected currencies, but not accepted by everyone, everywhere. For that matter, neither are U.S. dollars.

 

Note what is not on the list: money is not a unit created or regulated by a central authority, although governments would like us to think so. In fact, no central authority is necessary or even desirable. For centuries the lack of monetary authority was historic fact, back with medieval markets through to private banks, until 1913, 1933, 1971, and the modern evolution into today’s near-total digital fiat. Besides the technical challenge, eliminating their overhead, oversight, control and corruption is the point of Bitcoin. And right now the government’s response to Bitcoin is a strange mixture of antipathy, ignorance, oppression, and opportunity. At $160 Billion it hardly merits the interest of a nation with a $500 Billion trade deficit, and that’s spread worldwide.

This leads into one of the spurious claims on Bitcoin: that it’s a refuge for drug smugglers and illegal activities. I assure you mathematically, that is not true. According to the U.N. the world drug trade is $435B, 4 times the total, and strictly theoretical value of Bitcoin, coins locked, lost, and all. Besides if you owned $160B coins, who would you transfer them to? You’re the only user. $435B/year can only be trafficked by major banks like as HSBC, who have paid public fines because money flows that large can’t be hidden. This is so well-known the U.N. suggested the drug-money flows may be one reason global banks were solvent in ‘08. Even $160B misrepresents Bitcoin because it had a 10-fold increase this year alone. So imagine $16B total market cap. That’s half the size of the yearly budget of Los Angeles, one city. Even that overstates it, because through most of its life it’s been around $250, so imagine a $4B market cap, the budget of West Virginia.

So you’re a drug dealer in illicit trades and you sell to your customers because all your buyers have Bitcoin accounts? Your pushers have street terminals? This doesn’t make sense. And remember as much as the price of Bitcoin has risen 40-fold, the number of participants has too. Even now, even with Coinbase, even with Dell and Overstock, even with BTC $10,000 almost no one has Bitcoin, even in N.Y.C. or S.F.. So who are these supposed illegal people with illegal activities that couldn’t fit any significant value?

That’s not to say illegal activities don’t happen, but it’s the other half of the spurious argument to say people don’t do illegal acts using cash, personal influence, offshore havens, international banks like Wells Fargo, or lately, Amazon Gift Cards and Tide Detergent. As long as there is crime, mediums of value will be used to pay for it. But comparing Bitcoin with a $16B market cap to the existing banking system which the U.N. openly declares is being supported by the transfer of illicit drug funds is insanity.

Let’s look at it another way: would you rather: a) transfer drugs using cash or secret bank records that can be erased or altered later or b) an public worldwide record of every transaction, where if one DEA bust could get your codes, they could be tracked backwards some distance through the buy chain? I thought so. Bitcoin is the LEAST best choice for illegal activities, and at the personal level where we’re being accused, it’s even worse than cash.

We showed that Bitcoin can be money, but we already have a monetary and financial system. What you’re talking about is building another system next to the existing one, and doubling the costs and confusions. That’s great as a mental exercise but why would anyone do that?

In a word: 2008.

It’s probably not an accident Bitcoin arrived immediately after the Global Financial Crisis. The technology to make it possible existed even on IRC chat boards, but human attention wasn’t focused on solving a new problem using computer software until the GFC captured the public imagination, and hackers started to say, “This stinks. This system is garbage. How do we fix this?” And with no loyalty to the past, but strictly on a present basis, built the best mousetrap. How do we know it’s a better mousetrap? Easy. If it isn’t noticeably better than the existing system, no one will bother and it will remain an interesting novelty stored in some basements, like Confederate Dollars and Chuck-e-Cheez tokens. To have any chance of succeeding, it has to work better, good enough to overcome the last most critical aspect money has: Inertia.

So given that Bitcoin is unfamiliar, less accepted, harder to use, costs real money to keep online, why does it keep gaining traction, and rising in price with increasing speed? No one would build a Bitcoin. Ever. No one would ever use a Bitcoin. Ever. It’s too much work and too much nuisance. Like any product, they would only use Bitcoin because it solves expensive problems confronting us each day. The only chance Bitcoin would have is if our present system failed us, and fails more every day. They, our present system-keepers, are the ones who are giving Bitcoin exponentially more value. They are the ones who could stop Bitcoin and shut it down by fixing the present, easy, familiar system. But they won’t.

 

Where has our present system gone wrong? The criticisms of the existing monetary system are short but glaring. First, everyone is disturbed by the constant increase in quantity. And this is more than an offhand accusation. In 2007 the Fed had $750B in assets. In 2017 they have $4.7 Trillion, a 7-fold increase. Where did that money come from? Nowhere. They printed it up, digitally.

 

 

The TARP audit ultimately showed $23 trillion created. Nor was the distribution the same. Who received the money the Fed printed? Bondholders, Large Corporations, Hedge Funds and the like. Pa’s Diner? Not so much. So unlike Bitcoin, there not only was a sudden, secret, unapproved, unexpected, unaccountable increase in quantity, but little to no chance for the population to also “mine” some of these new “coins”. Which leads to this:

 

 

Near-perfect income disparity, with near-perfect distribution of new “coins” to those with access to the “development team”, and zero or even negative returns for those without inside access. Does this seem like a winning model you could sell to the public? Nor is this unique to the U.S.; Japan had long ago put such methods to use, and by 2017 the Bank of Japan owns a mind-bending 75% of Japanese ETFs:

 

 

So this unelected, unaccountable bank, which creates its coin from nothing without limit or restraint, now owns 75% of the actual hard labor, assets, indeed, the entire wealth HISTORY of Japan? It took from the Edo Period in 1603 through Japan-takes-the-world 1980s until 2017 to create the wealth of Japan, and Kuroda only 6 years to buy it all? What madness is this?

Nor is Europe better. Mario Draghi has now printed so much money, he has run out of bonds to buy. This is in a Eurozone with a debt measuring Trillions, with $10 Trillion of that yielding negative rates. That’s a direct transfer from all savers to all debtors, and still the economy is sinking fast. Aside from how via these bonds, the ECB came to own all the houses, businesses, and governments of Europe in a few short years, does this sound like a business model you want to participate in?

So the volume of issuance is bad, and unfairness of who the coins are issued to is as bad as humanly possible, giving incredible advantages to issuers to transfer all wealth to themselves, either new or existing.

But if the currency is functional day-to-day, surely the issuance can be overlooked. Is it? Inflation is devilishly hard to measure, but here’s a chart of commodities:

 

 

CPI:

 

 

The US Dollar:

 

 

or vs Gold (/silver):

 

 

Does that look stable to you? And not that Bitcoin is stable, but at least Bitcoin goes UP at the same rate these charts are going DOWN. One store coupon declines in value at 4% a year, or may even start negative, while the other gives steady gains to loyal customers. Which business model would you prefer?

But that’s not all.

 

 

Chapter 1 of this five-part series is here: Bitcoin Doesn’t Exist – 1

Chapter 3 will follow shortly.

 

 

Dec 052017
 
 December 5, 2017  Posted by at 12:14 pm Finance Tagged with: , , , , , , , , , ,  7 Responses »
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Gustave Courbet The wave 1869

 

 

A while ago, I asked a regular commenter at the Automatic Earth, who goes by the moniker Dr. D, to try and write an article for us. Not long after, I received no less than 31 pages, and an even 12345 words. Way too long for today’s digital attention spans. We decided to split it into 5 chapters. After we work through those 5, we’ll post it as one piece as well. Dr. D, who insists on sticking with his nom de plume, picked his own topic, and it’s -fittingly- bitcoin. A topic about which one can cover a lot of ground in 12345 words.

Now, I wouldn’t be me if I didn’t throw in my own two Satoshis: Dr. D claims that “..everyone has an equal opportunity to solve the next calculation..”, but while that may perhaps have been sort of true at the very start, it isn’t now. It’s not true for the computerless or computer-illiterate, for those too poor to afford the electricity required by bitcoin mining, and for various other -very large- groups of people.

The equal opportunity idea sounds nice, but I think bitcoin runs the risk of creating just another set of elites, while reinforcing existing elites, who can afford to either buy bitcoin at whatever price at some point in time, or spend large sums to build mining ‘installations’ in locations where electricity is cheap. And sure, there will be losers among elites too, but inequality itself will not change; only the faces of winners and losers will, while the world’s real losers will remain just that.

It’s nothing new of course, inequality is our society’s middle name, but maybe that is precisely the problem. Maybe bitcoin should have come with an inbuilt way to spread wealth, not just shift it around.

Then again, it may all just be a giant bubble. Or a bubble inside a bubble inside a bubble.

 

Here’s your Dr.:

 

 

Dr. D: Bitcoin is all the rage today, and as it crosses over $10,000, a 10-bagger for the year, we should look at what it is, what it isn’t, and why it’s become so popular. Note my observations are those of a layman – which may be more useful than those of a programmer – but also those of a skeptic, which I’ll get to at the end.

First, what is Bitcoin? Well, the idea of digital money goes back to the first digits, financial mainframes. In fact, the “money” in use today throughout the financial system have long been no more than virtual 1’s and 0’s on a spinning hard drive somewhere, but the idea of Bitcoin-money, private-money, goes back further still. I mean, what is “money”? At its core, it’s no more than the most-tradable good in a given society, a trading chit we use as a measurement tool, a token recording how much value we created or are owed. Arguably the first money was not gold, not seashells or even barter, but a promise. Let me borrow your net and I’ll give you a couple fish from the work. Why? Because you might break the net or I might use it, so I need to get paid for my risk, reward for my effort in making and storing the net to begin with.

So money at its most austere is simply a promise. But a promise to whom for what? And that’s the problem. No matter what good you use, people place differing values on it, different time-preferences, and most especially ways to cheat, game the system, and renege. This is bad among businesses, banks – who are after all only men – especially bad among governments, but worst of all among government and banks combined. Because, should the banks lie, renege, default, abuse their privilege, who then would hold them to task?

In the past, over and over, groups have created their own “money”. The whole 19th century was marked by general stores extending credit, bank notes issued by thousands of private banks, each with their own strength and solvency and geography and discounted accordingly. In the 20th century, with central banks controlling money, many cities issued local “scrip” – promises to pay – in Detroit in the Depression, or California in the budget crunch of 2009, or “Ithaca Dollars” in NY as a sort of ongoing Ivy League experiment. But the problem with these only highlight the problems with money generally:who can issue them? Everyone? A central authority? Can they deliver goods? And what can they buy, not just in value but in location?

Ithaca Dollars or California Tax Vouchers are not much good to buy oil from Texas or tea from China. People will always prefer a good that is accepted everywhere, with no decay and no discount, because ultimately the money flows away, offshore or to central taxation, which makes local currencies ever-less valuable. But even if successful it leads to a new set of problems: if Detroit or Ithaca Dollars were in high demand, there would be ever-stronger incentive to counterfeit, cheat, and double-spend them. Thus from the Renaissance to now we used reputable banks backed by force of governments, through the Gold standard and the Fiat age until today.

Enter the hackers.

It’s not that these problems are unknown, or haven’t been approached or attempted before. Every generation, when they find the banks + government take a percentage for their costs to insure the system, thinks how can we do away with these guys, who both take too much and end up in an unapproachable seat of power? I mean, aren’t we supposed to be a Democracy? How can we have a fair society if the Iron Bank is both backing all governments at once, on both sides of a war? What good is it to work if compounding interest invariably leads to their winning Boardwalk and Park Place 100% of the time? But despite several digital attempts – some immediately shut down by government – no one had a solution until Satoshi Nakamoto.

We don’t know who Satoshi Nakamoto is, but since several of the well-meaning developers were immediately jailed for even attempting private money on reasons arguably groundless, we can suppose he had good incentive to remain anonymous. And speculation aside, it doesn’t matter: Satoshi’s addition was not “Bitcoin” per se, but simply an idea that made private currency possible. The domain Bitcoin.org was registered in 2008, showing intent, and the open-source code was promoted to a small cryptography group in January 2009. But what was it? What did it solve?

Double-spending. Basically, the problem of money comes down to trust. Trust between individuals, between the system, but also partly trust in non-interference of governments or other powerful groups. Bitcoin is a trust machine.

How does it work? Well, the basic problem of cheating was one of not creating fake, hidden registers of value, as the U.S. Government, J.P. Morgan, and the Comex do every day. If they asked Yellen to type some extra zeros on the U.S. ledger, print a few pallets of $100 bills to send to Ukraine, who would know? Who could stop them? So with Bitcoin, the “value”, the register is created by essentially solving a math problem, akin to discovering prime numbers. Why do something so pointless? Simple: math doesn’t lie. Unlike U.S. Dollars, there are only so many prime numbers. We can be certain you won’t reach 11-digits and discover an unexpected trove of a thousand primes in the row. Can’t happen. However useless, Math is certainty. In this case, math is also limited. It’s also known and provable, unlike the U.S. budget or Federal Reserve accounting.

The second problem of cheating was someone simply claiming chits they did not own. This was solved by having the participants talk back and forth with each other, creating a public record or ledger. In fact, Bitcoin is nothing more than a very, very long accounting ledger of where every coin came from, and how every coin has moved since then, something computers do very well. These accounting lines register amongst all participants using a process of confirmed consensus.

Double-spending is when someone writes a check either against money they don’t have (yet) and round-robin in the money for the one second of clearing, or else write a check against money they DO have, but then cancel the check before it clears, walking away with the goods. In a standard commerce, the bank backfills fraud and loss and the government arrests, tries, and imprisons people, but it’s no small cost to do so. Although there is still a small possibility of double-spending, Satoshi’s plan effectively closed the issue: the ledger is either written, or unwritten. There is no time in the middle to exploit.

 

Great for him, but if I buy coins by Satoshi and the original cryptogroup, won’t I just be transferring all my value to make them rich? Although Bitcoin supply may be limited by mathematics, this is the issuer problem. It is solved because as a free, open source code, everyone has an equal opportunity to solve the next calculation. Bitcoin starts with the original 50 coins mined in 2009, so yes, early adopters get more: but they took more risk and trouble back when it was a novelty valuable only as proof-of-concept. The original cash transaction was between hackers to buy two pizzas for 10,000 BTC ($98M today). Why shouldn’t they get preference? At the same time, we are not buying all 20 Million eventual coins from Satoshi and his close friends, which is arguably the case with the Federal Reserve and other central banks. Bitcoin is bought and created from equal participants who have been actively mining as the coins appear, that is, from doing electronic work.

This leads to the next challenge: why would anyone bother keeping their computers on to process this increasingly long accounting ledger? Electricity isn’t free. The process of “mining” is the recording of Bitcoin transactions. The discovery of coins therefore effectively pays for the time and trouble of participating in a public accounting experiment. Even should that stop, the act of using Bitcoin itself cannot be accomplished without turning on a node and adding lines to process the ledger. So we can reasonably expect that people will keep Bitcoin software “on” to help us all get Bitcoin work done. That’s why it’s a group project: public domain shareware.

What if they shut it down? What if it’s hacked? This leads to the next problem: resiliency. You have to go back a step and understand what Bitcoin is: a ledger. Anyone can store one, and in fact participants MUST store one. If Bitcoin were “shut off” as it were, it would be stored with each and every miner until they turned their computers back on. If it’s “off” there’s no problem, because no one transferred any Bitcoin. If it’s “on” then people somewhere are recording transactions. Think of it like a bowling group keeping a yearly prize of the ugliest shirt. Is there an actual shirt? No, the shirt is not the prize. Is there a gold trophy? No, “prize” is simply the knowledge of who won it. There is no “there”, no physical object at all. Strangely, that’s why it works.

 

This is important for the next problem: intervention. Many private monies have been attempted, notably e-gold within Bitcoin’s own origin. But the problem was, if there was anything real, like a gold bar, it could be encumbered, confiscated, and stolen. You’d have to trust the vault, the owner, the auditor and we’re back in the old system. At the same time, if Satoshi were keeping the Bitcoin record and had any human power over it at all, government could imprison him, pass a law, create a cease-and-desist, or demand he tamper with the record, which they did with e-gold. But Satoshi does not have that power, and no one else does either.

Why? Precisely because Bitcoin DOESN’T exist. It’s not a real thing. Or rather, the only “real” thing is the ledger itself which is already public to everyone everywhere. You can’t demand the secret keys to Bitcoin privacy because it’s already completely, entirely public. What would a government demand? Suppose they ordered a miner to alter the record: the other miners would instantly reject it and it would fail. Suppose they confiscated the ledger: they now own what everyone already has. Suppose they unplugged it: they would have to unplug the entire internet, and everything else on it, or every Bitcoin node, one-by-one, worldwide. If any nodes were ever turned on, all Bitcoin would exist again.

Can they track them down? Not really. In theory, Bitcoin can be written on paper without an Internet. In practice, any public or private keys certainly can be. So even chasing down the Internet it would be very difficult to stop it given sufficient motivation, like the Venezuelan hyperinflation where they are chasing down miners, wallets, and participants, and failing despite overwhelming force.

What about privacy? A completely public ledger recording every person and every transaction seems like a police state’s dream of enforcement and taxation. Is it private? Yes and no. The Bitcoin ledger is not written like “Senator Smith spent .0001 BTC on August 21st, 2015 to buy a sex toy from Guangzhou,” but Wallet #Hash2# transferred .00017 BTC to wallet #Hash3# at UTC 13:43:12 21:11:2017 – or not even that: it’s encrypted. Who is #Hash2#? You can go back, but it will only say #Hash2# exists and was created on Time:Date. Who is #Hash3#? The ledger only says #Hash3# was created a minute ago to receive the transaction. In fact, #Hash2# may have been created solely to mask the coin transferred from #Hash1#. So is it anonymous? Not exactly. Given enough nodes, enough access to the world’s routers, enough encryption, you might see #Hash2# was created in Pawtucket, and if #Hash2# is not using active countermeasures, perhaps begin to bring a cloudy metadata of #Hash2# possible transactions into focus, tying it to Amazon, then a home address, but the time and resources required to break through would be astronomical.

What about theft? Yes, like anything else it can be stolen. If you break into my house and tie me up, you can probably get the keys. This is also true online as you must log on, type a password that can be logged on a screen that can be logged over a network that can be logged, but think again about what you’re doing: does it make sense to break into every participant’s computer one by one? Most Bitcoin is held by a few early adopters, and probably those wallets were lost when their hard drives crashed, the users lost their passwords, or died before this computer experiment had any value. We know for a fact that all of Satoshi’s original coins, 2.2 million of them, have NEVER been spent, never moved on the ledger, suggesting either death or the austerity of a saint.

So even today hacking a wallet, is far more likely to net $1.00 than $1M. Take a page from Willie Sutton: when asked why he robbed banks, he said, “that’s where the money is.” So today. Where is the real money stolen, transferred? From the ’08 bailout, the kiting of fake bonds in the market, the MF Globals, the rigging of LIBOR or the fake purchase of EU bonds. You know, where the money is. At $160B market cap, Bitcoin is still one week’s purchase of central bank bond buying, i.e. a rounding error, no money at all. Hack a home wallet? I guess, but hacking Uber or Equifax once is a lot easier than hacking 100,000 wallets on 100,000 different computers. At least you know you’ll get something.

But MT Gox was hacked and 650,000 coins went missing. Surely Coinbase, Gemini, Poloniex are the same. Well…not exactly.

 

 

Check in for Chapter 2 tomorrow.

 

 

Jan 092016
 
 January 9, 2016  Posted by at 9:42 am Finance Tagged with: , , , , , , , , ,  1 Response »
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DPC Longacre Square, soon to be Times Square 1904

Worst First Five Days of Year Ever For US Stocks Dim Outlook (WSJ)
The End of the Monetary Illusion Magnifies Shocks for Markets (BBG)
More Than 40% Of Young Americans Use Payday Loans Or Pawnshops (Ind.)
British People Donating Bodies To Science To Avoid Funeral Costs (Tel.)
Multiple Jobholders Responsible For 64% Of Net US Job Gains (ECRI)
First Profit Fall In 48 Years Looms Over US Energy Sector (MarketWatch)
Mining’s $1.4 Trillion Plunge Like Losing Apple, Google, Exxon Combined (BBG)
Inventor of Market Circuit Breakers Says China Got It Wrong (BBG)
China Market Tsar In Spotlight Amid Stock Market Turmoil (Reuters)
As Growth Slows, China’s Era of Easy Choices Is Over (WSJ)
Why China Shifted Its Strategy for the Yuan, and How It Backfired (WSJ)
China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To (BBG)
Shock, Laughter Greet Plan for Saudi Arabia’s Record Oil IPO (BBG)
Saudi Aramco’s Fire Sale (BBG)
US Accuses Volkswagen Of Poor Co-Operation With Probe (FT)
Visible Light From Black Holes Detected For First Time (Guardian)
Refugees Struggle In Sub-Zero Temperatures In Balkans (BBC)
Greek Police, Frontex To ‘Check’ Volunteers On Islands Receiving Migrants (Kath.)

China went up on Friday, but Wall Street did not. Omen?

Worst First Five Days of Year Ever For US Stocks Dim Outlook (WSJ)

The Dow industrials tumbled more than 1,000 points this week, marking the worst first five days of any year, as volatility across the globe rattled investors. Traders said they are bracing for further big swings in the weeks to come. The Dow fell 1% Friday after starting the day in positive territory amid a strong U.S. jobs report and an uneventful session in China’s markets overnight. But shares slumped in afternoon trading as investors became unwilling to enter the weekend exposed to the risk of further losses. In all, U.S. stocks lost $1.36 trillion in value this past week.

The unusually severe drop highlighted the precarious position of markets caught between relatively high valuations—attributable in part to years of easy money from central banks—and a new round of uncertainty about the fundamental underpinnings of key parts of the global economy. “The conundrum is there are parts of the world that are doing fine…and we have pockets that aren’t doing so well,” said Lawrence Kemp, head of BlackRock’s Fundamental Large Cap Growth team. “Given what’s going on in China and the rest of the world, the U.S. economy could grow a little more slowly.” The Dow Jones Industrial Average lost 1,078.58 points in the first week of 2016, down 6.2%. The broader S&P 500 was down 6%, also its worst five-day start to a year, and the Nasdaq Composite Index was down 7.3%.

Traders said the glum tone is likely to carry over into the coming week, as U.S. companies start reporting earnings for the last quarter of 2015. Corporate-earnings reports are widely expected to be underwhelming. The strong dollar is weighing on the competitiveness of U.S. exporters and the dollar value of companies’ overseas sales. Oil prices, which fell below $33 a barrel Friday in New York before closing at $33.16, continue to weaken. And China’s growth remains slow. Fourth-quarter earnings by companies in the S&P 500 are expected to come in 4.7% lower than they were a year earlier, according to FactSet.

Read more …

Central banks

The End of the Monetary Illusion Magnifies Shocks for Markets (BBG)

Central bankers are no longer the circuit breakers for financial markets. Monetary-policy makers, market saviors the past decade through the promise of interest-rate reductions or asset purchases, now lack the space to cut further or buy more. Even those willing to intensify their efforts increasingly doubt the potency of such policies. That’s leaving investors having to cope alone with shocks such as this week’s rout in China or when economic data disappoint, magnifying the impact of such events. “The monetary illusion is drawing to a close,” said Didier Saint Georges at Carmignac Gestion, an asset-management company. “With central banks becoming increasingly restricted in their stimulus policies, 2016 is likely to be the year when the markets awaken to economic reality.” Even against the backdrop of this week’s market losses, Fed officials signaled their intention to keep raising interest rates this year.

Those at the ECB and BoJ ended last year playing down suggestions they will ultimately need to intensify economic-aid programs. They have only themselves to blame for becoming agents of volatility, according to Christopher Walen at Kroll Bond Rating. He told Bloomberg TV this week that officials’ willingness to keep interest rates near zero and repeatedly buy bonds and other assets meant they became “way too involved in the global economy” and should have left more of the lifting work to governments. The handover to looser fiscal policy now needs to happen if economic growth and inflation are to get the spur they need, said Martin Malone at London-based brokerage Mint Partners. “Major economies have exhausted monetary and foreign-exchange policies,” he said. “Government action must take over from central-bank policies, triggering more confident private-sector investment and spending.”

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Yeah, recovery.

More Than 40% Of Young Americans Use Payday Loans Or Pawnshops (Ind.)

Young people are turning to desperate means to make ends meet. New figures that show 42% of Millennials, the generation born between 1980 and the mid-1990s, have turned to alternative finance including payday lenders and pawnshops in the past five years. The numbers come from a survey of more than 5,000 Millennials in the US by PriceWaterhouseCoopers and the Global Financial Literacy Excellence Center at George Washington University. Reports show that Millennials are high users of payday loans in the UK too. A 2014 report by the Financial Ombudsman Service showed that customers complaining about payday lenders were far more likely to be drawn from the 25-34 age group than any other.

The PwC study showed that a third of Millennials are very unsatisfied with their current financial situation and 81% have at least one long term debt, like a student loan or mortgage. That’s before they are saddled with interest on a payday loan that can be as much as 2000%. “They have already maxed out everything else and so they’re going to behavior that’s deemed even riskier,” said Shannon Schuyler, PwC’s corporate responsibility leader. The report also found that almost 30% of Millennials are overdrawn on their current accounts and more than half carry a credit card. Millennials are not the only generation suffering from rising debts. Earlier this week the Bank of England published a report showing that household borrowing surged in the run up to Christmas. The monthly cash rise in consumer credit for November 2015 was the highest since February 2008.

Read more …

The shape of things to come. Who can afford a $5000-6000 funeral?

British People Donating Bodies To Science To Avoid Funeral Costs (Tel.)

People are choosing to donate their body to science to avoid the cost of paying for a funeral, MPs have been warned. A leading forensic anthropologist said giving remains to anatomy departments can be seen as a way of avoiding the burden of funeral costs. However, science departments are not always able to take a person’s body, because of disease or because there is simply no space. Professor Sue Black, Director of the Centre for Anatomy and Human Identification at the University of Dundee, told the bereavement benefits inquiry families can be shocked to realise their loved one’s remains cannot be donated. “It is important that bequeathal is not viewed as an option to address funeral poverty although for some individuals it is unquestionably used in this manner,” she said.

As Dundee has one of the highest levels of child and adult poverty in Scotland, Professor Black said it is “not unusual for our bequeathal secretary to receive calls that will relate to concerns over funeral costs.” The Work and Pensions Committee is investigating funeral poverty after a freedom of information request by the BBC found the cost to local councils of so-called “paupers’ funerals” has risen almost 30pc to £1.7m in the past four years. The number of public health funerals, carried out by local authorities for people who die alone or whose relatives cannot afford to pay, has also risen by 11pc. [..] Bodies donated to science are mainly used for medical training and research.

But some are turned down because they are not suitable for educational use, for example if there has been a post-mortem and the body has already been dissected, or because the person has had a particularly destructive form of cancer, or if they have had an organ transplant. Potential donors must also make their wishes clear in their lifetime. “It’s really important that if people think that they want to donate their body, there are things that they must do. It’s not enough to say if verbally, they have to either find the consent forms or make a legal statement in a will or testament,” Professor Black said. The average cost of a basic funeral is now £3,702 according to a recent report.

Read more …

Could be the major take-away from yesterday’s BLS report. Employment numbers do not reflect those of the employed.

Multiple Jobholders Responsible For 64% Of Net US Job Gains (ECRI)

The latest jobs report far exceeded consensus expectations as the economy added 292,000 nonfarm payroll jobs. But a closer look at the details reveals why concerns remain about the health of the labor market. In December, year-over-year (yoy) growth in multiple jobholders rose to an 11-month high, while yoy growth in single jobholders eased to a three-month low. Specifically, since May the number of multiple jobholders has increased by 752,000, while single jobholders have increased by 429,000. In other words, multiple jobholders have been responsible for 64% of the net job gains since last spring. The disproportionate importance of multiple jobholders – forced to cobble together a living – shows why the labor market is weaker than it seems. Notably, as long as these multiple jobholders log 35 hours of work per week – no matter how many part-time jobs that takes – they are considered full-time.

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1967. Remember?

First Profit Fall In 48 Years Looms Over US Energy Sector (MarketWatch)

The energy sector will depress U.S. fourth-quarter earnings and subdue growth for the entire S&P 500, making 2015 the weakest year for earnings since 2008, Goldman Sachs said Friday. The bank trimmed its S&P 500 earnings-per-share estimates for 2015, 2016 and 2017 in a note that highlighted three factors it expects to feature in earnings releases and on conference calls this year. The fourth-quarter and 2015 earnings season kicks off next week. The report from Aluminum producer Alcoa, scheduled for Monday after the market’s close, is seen as the unofficial start of several weeks of corporate news. The first factor Goldman highlighted is the energy sector, which the bank says is about to show a decline in operating earnings per share for 2015, its first negative reading since the bank started keeping records in 1967. “Energy EPS has collapsed along with crude oil prices,” analysts wrote in a note.

Energy EPS is highly sensitive to the price of oil, which Goldman is assuming will average $44 a barrel this year. Crude futures were trading below $33 a barrel early Friday, after hitting their lowest level since 2004 this week. Energy companies have been hammered by the slump in oil prices caused by oversupply, which has made some shale plays unprofitable and led companies to slash spending budgets, sell underperforming assets and cut staff and other costs. “The write-down in energy company assets has exacerbated the earnings hit from the 35% fall in Brent crude oil prices in 2015, following a 48% plunge in the commodity price in 2014,” said the note. In 2014, the energy sector accounted for $13, or 12%, of the overall S&P 500’s EPS reading of $113. In 2015, that contribution had tumbled to a loss of $2. That means energy contributed a $15 decline to S&P 500 earnings, which more than outweighed EPS gains in other sectors, said the note.

Read more …

Much more downside to come.

Mining’s $1.4 Trillion Plunge Like Losing Apple, Google, Exxon Combined (BBG)

The $1.4 trillion lost in global mining stocks since 2011 exceeds the total market value of Apple, Exxon Mobil and Google’s parent Alphabet. When you’ve spent a decade building new mines from the Andean mountains to the West African jungle, it’s bad news when a downturn in China, your biggest customer, shows no signs of stopping. Investors have been unforgiving and concerns that it will only get worse pushed the Bloomberg World Mining Index to an 11-year low. “It’s terrible, there are no two ways about it,” said Paul Gait at Sanford C. Bernstein in London. “A lot of people were hoping at the start of 2016 to see at least some stabilization in the commodity performance in these stocks. Essentially people were looking to close the consensus short that has characterized 2015. This has clearly not happened.”

BHP Billiton and Rio Tinto were once among the world’s largest companies. Shares of the biggest commodity producers trading in London are now at least twice as volatile as the U.K.’s benchmark stock index. Raw-material prices slipped to the lowest since 1999 on Thursday, with China’s stock market suffering its worst start to the year in two decades after the central bank cut the yuan’s reference rate by the most since August. A weaker currency encourages exports from the nation and makes it costlier for it to import commodities, hurting those that supply them. Anglo American, worth almost £50 billion ($73 billion) in 2008, is now valued at £3.1 billion. The 99-year-old company, which is the world’s biggest diamond and platinum producer and owns some of the best copper and coal mines, is now worth less than mid-tier Randgold and copper miner Antofagasta.

Apple, the world’s most valuable company, is worth about $549 billion. Alphabet is valued at $510 billion and Exxon $321 billion. The Bloomberg mining index of 80 stocks slumped as much as 4.1% on Thursday to the lowest since 2004. Anglo closed down 11% in London to the lowest since it started trading in 1999. BHP tumbled 5% and Rio retreated 3.4%. Glencore settled down 8.3%.

Read more …

They seem to get a lot wrong.

Inventor of Market Circuit Breakers Says China Got It Wrong (BBG)

The man responsible for stock circuit breakers says Chinese officials must revise their safety net to avoid creating panic, joining critics who argue the nation’s trading halts are triggered too easily for such a volatile market. “They’re just on the wrong track,” said Nicholas Brady, 85, the former U.S. Treasury secretary who ran a committee that recommended the curbs on equity trading after the 1987 crash. “They need a set of circuit breakers that appropriately reflects their market.” Brady spoke Thursday after Chinese regulators suspended their newly introduced program that ends stock trading for the entire day after a 7% plunge. The halt was set off twice in its first week of operation, bolstering speculation China set its threshold too low. “The right thing to do is to widen their band,” Brady said in an interview.

The U.S. confronted a similar problem in the 1990s. The curb that the Brady Commission helped implement shut the market for the first time on Oct. 27, 1997, when the Dow Jones Industry Average lost 554 points. That was only a 7.2% decline, almost identical to the Thursday plunge in China’s CSI 300 Index. The trouble was that a decade-long surge in U.S. stock prices had diminished the value of each point in the Dow. The 1987 crash’s 508-point slump had amounted to a 23% tumble, three times greater than the decline that froze trading 10 years later. Regulators and exchanges pushed through a revision: If the Dow fell 10%, there would be an hour pause. At 20%, trading would cease for two hours, and at 30%, the day would end early.

In recent years, the benchmark that triggers the halts switched to the Standard & Poor’s 500 Index and the levels changed. Now it takes 7% and 13% drops to prompt a brief pause, and a 20% decline to close markets early for the day. Whereas 7% losses are rare in the U.S. – they were only common during the 2008 financial crisis, October 1987, and the Great Depression – Chinese shares have dropped about that much seven times in the past year. “I don’t think this is an exact science,” said Sang Lee, an analyst at financial-markets researcher Aite Group. With circuit breakers, “If you set these too low, instead of easing volatility it may increase volatility. That echoes the view of Brady, who was chairman of Wall Street powerhouse Dillon Read & Co. when President Ronald Reagan asked him to figure out what happened during the 1987 crash and propose solutions.

Read more …

Lost in Beijing hubris.

China Market Tsar In Spotlight Amid Stock Market Turmoil (Reuters)

Xiao Gang, China’s stock market tsar, once remarked that the only thing he’d done right in life was marry his wife. No doubt the self-effacing Xiao, chairman of China Securities Regulatory Commission (CSRC), has done many other things right. Managing the stock market, though, might not be a high point of his career. Xiao faced internal criticism from the ruling Communist Party for his handling of the stock market crash last year, sources with ties to the leadership said at the time. In another blow, a “circuit breaker” mechanism to limit stock market losses that was introduced on Monday was deactivated by Thursday after it was blamed for exacerbating a sharp selloff. Online media had nicknamed Xiao “Mr Circuit Breaker”.

“There has to be responsibility. People are looking to the leader at the regulator. Xiao Gang is the public face,” said Fraser Howie, an independent China market analyst. “He was lucky to keep his job after the fiasco of July and August.” Xiao, 57, became chairman of the CSRC in the leadership churn when President Xi Jinping came into power, taking the helm of the regulator in March 2013. At the time, Chinese markets had been among the world’s worst-performing for six years – indeed they had not recovered from their collapse during the global financial crisis. Unfortunately for Xiao, they still haven’t. The challenge Xiao faced upon taking up the post was enormous: to attract fresh investment into equities from speculative bubbles in sectors like real estate, while defending against endemic insider trading.

To pull any of this off he needed to first convince China’s legions of small retail investors, who dominate transactions but are infamously fond of quick-hit speculative plays, that stocks are a safe place to park long-term capital. The urgency was heightened by the need to deal with China’s corporate debt overhang – Chinese firms had become almost entirely dependent on bank loans for financing, which naturally prejudiced economic development toward collateral-rich heavy industry and away from the innovative, nimble technology companies that tend to rely more on stock issuances to fund quick growth.

Read more …

Chinese politics clash with economics. By default. It’s not just pushing a button or pulling a lever.

As Growth Slows, China’s Era of Easy Choices Is Over (WSJ)

China has pulled hundreds of millions of people from poverty, supercharged its economy and burnished the pride of a nation that stood weak and isolated only decades ago. But swelling levels of debt, bloated state companies and an overall aversion to market forces are swamping the world’s second-largest economy, threatening to derail China’s ascent to the ranks of rich countries. As Beijing battles another bout of stock-market turmoil—and global markets shudder in response—the risks of doing nothing about these deep-seated problems are rising, economists said. Without a change in course, they said, China faces a period of low growth, crimped worker productivity and stagnating household wealth. It’s a condition known as “the middle-income trap.” “The era of easy growth is over,” said Victor Shih, professor at the University of California-San Diego.

“It’s increasingly about difficult choices.” Some economists don’t rule out an abrupt drop in growth, a hard landing that would see bad debts soar, consumer confidence tank, the Chinese yuan plunge, unemployment spiral and growth crater. More likely is that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan. An anemic China would weaken global growth at a time of low demand and prolong the downturn for big commodity producers like Brazil that have been dependent on the Asian economic giant. “They don’t want to take the pain,” said Alicia Garcia Herrero at investment bank Natixis. “But the longer they wait, the more difficult it becomes.”

Chinese leaders are aware of the risks. On Tuesday, Premier Li Keqiang called for a greater focus on innovation to spur new sources of economic growth and to revitalize traditional sectors, according to the Xinhua. A far-reaching economic blueprint laid out in 2013 after President Xi Jinping came to power vowed to let markets take a “decisive” role and build out a legal framework to restructure the economy and benefit consumers and small businesses, rather than industry. Progress to date, economists said, has been disappointing. Political objectives stand in the way. Mr. Xi has committed the government to meeting a goal of doubling income per person between 2010 and 2020, the eve of the 100th anniversary of the ruling Communist Party. That means, in Mr. Xi’s eyes, that growth must reach 6.5% annually. With global demand slipping and fewer Chinese entering the workforce, Beijing will need to resort to stimulus spending to get there, analysts said, delaying the reckoning with restructuring.

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“As of September, China’s outstanding foreign debt stood at $1.53 trillion. More than two-thirds of that amount is expected to come due within a year..”

Why China Shifted Its Strategy for the Yuan, and How It Backfired (WSJ)

The IMF’s decision on Nov. 30 to declare the yuan an official reserve currency removed an incentive for the central bank to keep propping up the currency. Rather, it aims to let it gradually depreciate with an eye toward sending it modestly higher in this year’s second half, according to advisers to the PBOC. That is when Beijing will host leaders from the Group of 20 major economies and will be eager to showcase China’s economic might. But that strategy is fraught with risks. Chief among them, analysts say, is the difficulty in reversing continued market expectations for a still-weaker yuan. In Hong Kong, where the yuan can be bought and sold freely, the Chinese currency now trades at a steep discount to its mainland cousin, whose trading is limited within a government-dictated band.

The gap has led some investors to try to profit from the different exchange rates, causing irregular flow of funds across China’s borders. By intervening in the Hong Kong market Thursday to try to cap the offshore yuan rate and at the same time allowing the onshore rate to weaken faster, the central bank appears to be attempting to find “a near-term market equilibrium level that can help the exchange rates converge,” analysts at HSBC wrote in a research note. The central bank also doesn’t want a too-weak yuan to exacerbate capital outflows and make it more difficult for Chinese companies to pay off their dollar-denominated debt. As of September, China’s outstanding foreign debt stood at $1.53 trillion. More than two-thirds of that amount is expected to come due within a year, according to government data.

Among the big foreign-debt holders are Chinese property companies, which have more than $60 billion of dollar debt outstanding, according to data provider Dealogic. Wary of continued weakening of the yuan, some Chinese companies are moving to pay off their debt early. State-run airliner China Eastern Airlines paid down $1 billion of dollar debts on Monday, citing the need to reduce its exposure to exchange-rate fluctuations. For many years, the prevailing investor sentiment had been the yuan had no way to go but up as China’s trade surplus surged. Investors have now shifted their mind-set to the other extreme.

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Will they have any FX reserves left a year from now? It’s not all that obvious.

China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To (BBG)

China’s $3 trillion-plus in foreign currency reserves, the biggest such stockpile in the world, would seem to be a gold-plate insurance policy against the country’s current market chaos, a depreciating currency and torrent of capital leaving the country. Maybe not, say economists. First off, data point to an alarming burn rate of dollars at the People’s Bank of China. The nation’s stockpile of foreign exchange reserves plunged by $513 billion, or 13.4%, in 2015 to $3.33 trillion as the nation’s central bank coped with a weakening yuan and an estimated $843 billion in capital that left China between February and November, the most recent tally available according to data compiled by Bloomberg. “My greatest worry is the fast depletion of FX reserves,” said Yu Yongding, a member of China’s monetary policy committee when the currency was revalued in 2005.

True, trillions of dollars under the central bank’s care are thought to be invested in safe liquid securities, including Treasury bonds. The U.S. measure of China’s holdings of Treasuries, the benchmark liquid investment in dollars, stood at $1.25 trillion in October, according to the U.S. Treasury Department, which cautions that the figures may not reflect the true ownership of securities held in a custodial account in a third country. In China, like some other countries, the exact composition of China’s reserves is a state secret. But analysts worry the currency armory may not be as strong as it looks. That’s because some of the investments may not be liquid or easy to sell. Others may have suffered losses that haven’t been accounted for.

In addition, some Chinese reserves may have already been committed to fund pet government projects like the Silk Road fund to build roads, ports and railroad across Asia or tens of billions in government-backed loans to countries such as Venezuela, much of which is repaid through oil shipments. Then there are other liabilities that China needs to cover, such as the nation’s foreign currency debt to finance and manage imports denominated in overseas currencies. When those factors are taken into account, some $2.8 trillion in reserves may already be spoken for just to cover its liabilities, according to Hao Hong at Bocom International. “Considering China’s foreign debt, trade and exchange rate management, it needs around $3 trillion in foreign exchange reserves to be comfortable.” he said.

[..] “Where is the line in the sand, and what happens when we get there?,” said Charlene Chu, the former Fitch analyst known for her warnings over China’s debt risks. “China’s large hoard of foreign reserves gives the country considerable power and influence globally, and I would think they would want to protect that. If there is such a line in the sand, it is very possible we hit it in 2016.” To be sure, intervention isn’t the only thing dragging China’s reserves lower. There’s also a valuation impact from fluctuating currencies. Some of the fall may also reflect authorities accounting for its investments. Chu reckons much of the decline up to June 2015 was mostly due to investments in illiquid assets and valuation changes rather than capital outflows.

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“The company could be worth anything from $1 trillion to upwards of $10 trillion..”

Shock, Laughter Greet Plan for Saudi Arabia’s Record Oil IPO (BBG)

When one financial adviser heard about Saudi Arabia’s plans to list a company larger than the economies of most nations, he had to pull over his car because he was laughing so hard. Saudi Arabian Oil Co., or Aramco, the world’s largest oil producer, said Friday it’s considering an initial public offering. It confirmed an interview with Deputy Crown Prince Mohammad bin Salman published in the Economist Thursday. The news was greeted with incredulity in the financial industry, according to interviews with a half dozen bankers who do business in the Middle East. They asked not to be identified to protect their business interests. For one thing, Aramco’s inner workings are opaque, making its true value a mystery. Then there’s the timing. The price of crude oil is near its lowest level in more than a decade.

Discussions with Aramco about selling assets in the past had been about much smaller parts of the business, five of the people said. An initial public offering of the entire enterprise had only ever been discussed as a joke, one of the people said. The company could be worth anything from $1 trillion to upwards of $10 trillion, which would make it the most valuable company in the world, according to a note from Jason Tuvey at research firm Capital Economics. The last mega IPO from the oil industry was a decade ago, when Russia’s OAO Rosneft raised more than $10 billion. Even if Saudi Arabia sells a small stake, a listing could easily surpass that of Alibaba whose $25 billion IPO is the largest on record. Still, Aramco is unlikely to list on the biggest exchanges, according to Bloomberg oil strategist Julian Lee.

That would require the government to give investors more detailed information about Aramco’s reserves and production capacity, something oil-producing nations consider state secrets, he said. Aramco is considering selling an “appropriate%age” of its shares in the capital markets or listing a bundle of its subsidiaries, it said in the statement. Saudi Arabia typically sells stakes in state-owned companies to the public at below market value as part of its efforts to redistribute wealth. National Commercial Bank raised $6 billion in 2014 in the Middle East’s largest share sale. As the bankers do the sums, a big IPO won’t necessarily translate into big fees. Governments often pay low fees on their exits.

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“.. it’s hard not to see talk of floating Aramco as a defensive move forced on a kingdom that is under pressure on the financial, political and military fronts.”

Saudi Aramco’s Fire Sale (BBG)

That strange and rather unappetizing sound you just heard was the world’s energy bankers simultaneously salivating over the prospect of the oil deal of the century. In an interview published Thursday by The Economist, Saudi Arabia’s deputy crown prince Muhammad bin Salman said his country is considering privatizing Saudi Aramco. A quick back-of-the-envelope calculation for a company whose oil reserves dwarf those of Exxon Mobil yields a potential market capitalization of: gajillions. Apart from anything else, Aramco’s role in supplying roughly a tenth of the world’s oil would make its earnings guidance required reading not merely for sell-side analysts, but central bankers, government leaders and generals, too.There are many caveats here, beginning with the fact that the privatization is “something that is being reviewed.”

And if privatization were to proceed, it might well involve listing shares in some downstream part of Aramco such as petrochemicals, rather than the core upstream business or parent company. The bigger issue, though, is the idea appearing to have any traction at all and being spoken of publicly by no less a figure than the deputy crown prince. It adds a further twist to a narrative emanating from Saudi Arabia that suggests the global oil market is undergoing epochal change. The interview was wide-ranging, touching on relations with Iran and the U.S., women in the workforce, tax reform and possible privatization in many sectors, not just energy. And the deputy crown prince was in expansive mode, agreeing with his interviewer’s supposition that the autocratic kingdom is undergoing a “Thatcher revolution” and answering one question on attracting foreign investors with an almost Trumpian “I’m only giving out opportunities.”

The context for this sweeping vision, though, is the OPEC benchmark oil price having just slipped below $30 a barrel. The rational time to sell shares in Aramco would have been, let’s see, about 18 months ago, when oil was still trading in triple digits and the MSCI Emerging Markets Index was nudging 1100 rather than languishing below 750. Of course, other things play a part in deciding to privatize any state jewel of this scale – such as, in the words of the deputy crown prince, fostering transparency and strengthening the domestic stock market. Such factors were there, for example, in the privatization of China’s oil majors at the start of this century. Yet it’s hard not to see talk of floating Aramco as a defensive move forced on a kingdom that is under pressure on the financial, political and military fronts.

Saudi Arabia still sits on sizable foreign reserves. But the increases in (heavily subsidized) domestic fuel prices announced recently, as part of the country’s annual budget, indicate Riyadh’s desire to hunker down for a prolonged period of low oil prices. Indeed, it is possible that raising money from an Aramco IPO would be designed to show that the state is making its own sacrifices. [..] Change is clearly in the air. Riyadh is due later this month to unveil a medium-term “National Transformation Plan” aimed at, among other things, streamlining a public sector where wages swallow up nearly a fifth of GDP and diversifying the country’s tax base. This comes soon after a decision to open the country’s stock market to foreign investors. And, of course, it is happening amid an ongoing policy to maximize oil production in a suddenly much more competitive global oil market.

In one unnerving respect, this is bullish for oil: Ossified political structures are highly vulnerable precisely when they seek even partial reform. Any destabilization in Saudi Arabia could provide the supply shock that clears the glut in oil and raises oil prices. But don’t forget the warnings given by Saudi Arabia’s petroleum minister just over a year ago that global oil demand growth may face a “black swan” in the next few decades. Viewed through that lens, the policy of pumping more barrels out now looks like not merely a strategy to maintain market share but also to simply monetize reserves that might otherwise be left to mire underground. Take it one step further, and you might say the same of Riyadh suddenly deciding it’s time to cash in on Saudi Aramco now, oil price be damned.

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“VW cited German law as its reason for not co-operating.”

US Accuses Volkswagen Of Poor Co-Operation With Probe (FT)

Volkswagen is failing to co-operate sufficiently with a US investigation into the emissions scandal, according to New York attorney-general Eric Schneiderman, who warned that the authorities’ patience was “wearing thin”. Mr Schneiderman said on Friday that VW’s co-operation with a probe involving 47 state attorneys-general had been “spotty” and “slow”, adding to the German carmaker’s mounting troubles in the US. On Monday, the Department of Justice sued VW in a civil case, seeking at least $45bn in penalties. The US authorities’ clash with VW came as the company said that its annual sales had fallen last year for the first time in more than a decade.

A combination of the emissions scandal and turmoil in emerging markets has taken a toll on Europe’s biggest carmaker, pushing group-wide sales below 10m units in 2015. VW admitted in September that it had installed “defeat devices” in up to 11m cars, including 482,000 in the US, that served to understate the diesel-powered vehicles’ emissions of nitrogen oxides during official tests. The 47 state attorneys-general, plus prosecutors in Washington DC, are investigating whether VW violated environmental laws and misled consumers. The justice department is pursuing a similar probe now relating to almost 600,000 VW cars in the US.

“Volkswagen’s co-operation with the states’ investigation has been spotty — and frankly, more of the kind one expects from a company in denial than one seeking to leave behind a culture of admitted deception,” Mr Schneiderman said. He added that VW had been slow to produce documents from its US files, had sought to delay responses until it completed its own investigation, and had “failed to pursue every avenue to overcome the obstacles it says that German privacy law presents to turning over emails from its executives’ files in Germany”. “Our patience with Volkswagen is wearing thin,” Mr Schneiderman said. The New York Times first reported that VW was not handing over documents to the US authorities. VW cited German law as its reason for not co-operating.

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Not long ago the very idea was considered heresy.

Visible Light From Black Holes Detected For First Time (Guardian)

Astronomers have discovered that black holes can be observed through a simple optical telescope when material from surrounding space falls into them and releases violent bursts of light. The apparent contradiction emerges when a black hole’s gravity pulls in matter from nearby stars, producing light that can be viewed from a modest 20cm telescope. Japanese researchers detected light waves from V404 Cygni – an active black hole in the constellation of Cygnus, the Swan – when it awoke from a 26-year-long slumber in June 2015. Writing in the journal Nature, Mariko Kimura of Kyoto University and others report how telescopes spotted flashes of light coming from the black hole over the two weeks it remained active. The flashes of light lasted from several minutes to a few hours. Some of the telescopes were within reach of amateur astronomers, with lenses as small as 20cm.

“We now know that we can make observations based on optical rays – visible light, in other words – and that black holes can be observed without high-spec x-ray or gamma-ray telescopes,” Kimura said. The black hole, one of the closest to Earth, has a partner star somewhat smaller than the sun. The two objects circle each other every six-and-a-half days about 8,000 light years from Earth. Black holes with nearby stars can burst into life every few decades. In the case of V404 Cygni, the gravitational pull exerted on its partner star was so strong that it stripped matter from the surface. This ultimately spiralled down into the black hole, releasing a burst of radiation. Until now, similar outbursts had only been observed as intense flashes of x-rays and gamma-rays.

At 18.31 GMT on 15 June 2015, a gamma ray detector on Nasa’s Swift space telescope picked up the first signs of an outburst from V404 Cygni. In the wake of the event, Japanese scientists launched a worldwide effort to turn optical telescopes towards the black hole. The flickers of light are produced when x-rays released from matter falling into the black hole heat up the material left behind. Poshak Gandhi, an astronomer at Southampton University, said the black hole looked extremely bright when matter fell in, despite being veiled by interstellar gas and dust. “In the absence of this veil, V404 Cygni would have been one of the most distant objects in the Milky Way visible in dark skies to the unaided eye in June 2015,” he writes in the journal.

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Death stalks Europe.

Refugees Struggle In Sub-Zero Temperatures In Balkans (BBC)

Medics working at refugee aid camps in the Balkans say they are seeing a spike in the number of migrants falling ill as freezing temperatures arrive. It has fallen to as low as -11C (12F) in the region. The medical charities International Medical Corps and Medecins Sans Frontieres say most patients are suffering with respiratory problems such as bronchitis and flu. There are also concerns about people refusing or not seeking treatment. Migrants are offered medical assistance, warm clothes and food at the main refugee points at the Serbian border with Macedonia to the south, and Croatia to the north. International Medical Corps runs a makeshift clinic at the train station in the tiny town of Sid, in northern Serbia “Last week, when temperatures were a bit less, we were seeing around 50 to 60 people a day,” said Sanja Djurica, IMC team leader.

“This week, now that temperatures have fallen, it’s more like 100 or so a day.” “Almost all of them are suffering with respiratory illnesses brought on by the cold.” I met the Al-Maari family, who are making the journey as the snow falls thick and fast. They fled Syria three weeks ago, and have been on the road ever since. They are travelling with four children, the youngest is just two years old. His brother Mohammad, seven, is suffering with fever and a chest infection. “We are on a journey of death,” said Mohammad’s uncle, Iyad Al-Maari. “We can endure. But I am worried about the children – the cold, disease and hunger.” Mohammad is not thought to be seriously ill. Iyad said the family are determined to continue to Germany, where the children’s father is waiting for them.

“Some people are refusing further medical help after we’ve assessed them,” said Tuna Turkmen from MSF in Serbia. “Even if they are referred to hospital, most don’t go. They just want to keep moving… in case borders suddenly close and they are left stranded.” With tears in her eyes, Mohammad’s mother, Malak, said: “We didn’t want any of this… we just want the war to end in Syria.” The stress and anxiety can be seen clearly on Malak’s face. She is traumatised and desperate. Medics have also highlighted the enormous psychological impact on those making these journeys. International Medical Corps has psychologists on hand in Sid, and even though people only tend to stay there for a few hours, medics and aid workers do have some time to deliver “psychological first aid”. “It’s emotional comfort, empathetic listening and encouraging coping techniques,” said Sanja Djurica.

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Checking those who filled in when Europe was a no-show. What a joke.

Greek Police, Frontex To ‘Check’ Volunteers On Islands Receiving Migrants (Kath.)

The Greek Police and [EU border agency] Frontex are to carry out checks on non-governmental organizations and volunteers on islands of the northern Aegean which have been receiving large numbers of migrants, sources have told the Athens-Macedonia News Agency. “Our goal is not to offend the volunteers and employees of NGOs nor to disrupt their work but to simply highlight the presence of the police on the coastline and generally in areas where migrants and refugees are disembarking,” a police source told AMNA. There will also be an investigation into reports that certain individuals posed as refugees in order to steal the personal belongings of refugees or the smuggling boats on which they reach the islands. The broader checks will seek to determine that people declaring themselves as volunteers are working for an accredited organization. The aim is to restore a sense of security on the islands, police source said, not to prevent the work of the NGOs.

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Dec 102015
 
 December 10, 2015  Posted by at 9:42 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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Unknown GMC truck Associated Oil fuel tanker, San Francisco 1935

If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)
Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)
America’s Middle Class Meltdown (FT)
Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)
China Swallows Its Mining Debt Bomb (BBG)
China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)
Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)
Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)
Banks Buy Protection Against Falling Stock Markets (BBG)
Dividends Could Be the Next Victim of the Commodity Crunch (BBG)
Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)
US Companies Turn To European Debt Markets (FT)
Italy Needs a Cure for Its Bad-Debt Headache (BBG)
Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)
Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)
It’s Too Late to Turn Off Trump (Matt Taibbi)
War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)
Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Good headline.

If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)

The pain among energy and mining producers worsened again on Tuesday, as one of the industry’s largest players cut its work force by nearly two-thirds and Chinese trade data amplified concerns about the country’s appetite for commodities. The full extent of the shakeout will depend on whether commodities prices have further to fall. And the outlook is shaky, with a swirl of forces battering the markets. The world’s biggest buyer of commodities, China, has pulled back sharply during its economic slowdown. But the world is dealing with gluts in oil, gas, copper and even some grains. “The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm.

“Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.” The pressure on prices has been significant. Prices for iron ore, the crucial steelmaking ingredient, have fallen by about 40% this year. The Brent crude oil benchmark is now hovering around $40 a barrel, down from more than a $110 since the summer of 2014. Companies are caught in the downdraft. A number of commodity-related businesses have either declared bankruptcy or fallen behind in their debt payments. Even more common are the cutbacks. Nearly 1,200 oil rigs, or two-thirds of the American total, have been decommissioned since late last year.

More than 250,000 workers in the oil and gas industry worldwide have been laid off, with more than a third coming in the United States. The international mining company Anglo American is pulling back broadly, with a goal to reduce the company’s size by 60%. Along with the layoffs announced on Tuesday, the company is suspending its dividend, halving its business units, as well as unloading mines and smelters.

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How bad will the holiday shopping season get?

Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)

While we await the government’s retail sales data on December 11, the last official economic report the Fed will see before its December 16 FOMC decision, Bank of America has been kind enough to provide its own full-month credit card spending data. And while a week ago the same Bank of America disclosed the first holiday spending decline since the recession, in today’s follow up report BofA reveals that if one goes off actual credit card spending – which conveniently resolves the debate if one spends online or in brick and mortar stores as it is all funded by the same credit card – the picture is even more dire. According to the bank’s credit and debit card spending data, core retail sales (those excluding autos which are mostly non-revolving credit funded) just dropped by 0.2% in November, the first annual decline since the financial crisis!

At this point, BofA which recently laid out its bullish 2016 year-end forecast which sees the S&P rising almost as high as 2,300, and is thus conflicted from presenting a version of events that does not foot with its erroenous economic narrative, engages in a desperate attempt to cover up the ugly reality with the following verbiage, which ironically confirms that a Fed hike here would be a major policy error and lead to even more downside once it is digested by the market.

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Not usual FT language: “..the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society.”

America’s Middle Class Meltdown (FT)

America’s middle class has shrunk to just half the population for the first time in at least four decades as the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society. The ranks of the middle class are now narrowly outnumbered by those in lower and upper income strata combined for the first time since at least the early 1970s, according to the definitions by the Pew Research Center, a non-partisan think-tank in research shared with the Financial Times. The findings come amid an intensifying debate leading up to next year’s presidential election over how to revive the fortunes of the US middle class.

The prevailing view that the middle class is being crushed is helping to feed some of the popular anger that has boosted the populist politics personified by Donald Trump’s candidacy for the Republican presidential nomination. “The middle class is disappearing,” says Alison Fuller, a 25-year-old university graduate working for a medical start-up in Smyrna, Georgia, who sees herself voting for Mr Trump. Pew used one of the broadest income classifications of the middle class, in a new analysis detailing the “hollowing out” of a group that has formed the bedrock of America’s postwar success. The core of American society now represents 50% or less of the adult population, compared with 61% at the end of the 1960s. Strikingly, the change has been driven at least as much by rapid growth in the ranks of prosperous Americans above the level of the middle class as it has by expansion in the numbers of poorer citizens.

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Exporting commodities and deflation: “The excess capacity is cosmic.”

Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)

The world has had a year to brace for monetary lift-off by the US Federal Reserve. A near certain rate rise next week will come almost as a relief. Emerging markets have already endured a dollar shock. The currency has risen 20pc since July 2014 in expectation of this moment, based on the Fed’s trade-weighted “broad” dollar index. The tightening of dollar liquidity is what caused a global manufacturing recession and an emerging market crash earlier this year, made worse by China’s fiscal cliff in January and its erratic, stop-start, efforts to wind down a $26 trillion credit boom. The shake-out has been painful: hopefully the dollar effect is largely behind us. The central bank governors of India and Mexico, among others, have been urging the Fed to stop dithering and get on with it. Presumably they have thought long and hard about the consequences for their own economies.

It is a safe bet that Fed chief Janet Yellen will give a “dovish steer”. She has already floated the idea that rates can safely be kept far below zero in real terms for a long time to come, even as unemployment starts to fall beneath the 5pc and test “NAIRU” levels where it turns into inflation. Her apologia draws on a contentious study by Fed staff in Washington that there is more slack in the economy than meets the eye. She argues that after seven years of drought and “supply-side damage” it may make sense to run the economy hotter than would normally be healthy in order to draw discouraged workers back into the labour market and to ignite a long-delayed revival of investment. There are faint echoes of the early 1970s in this line of thinking. Rightly or wrongly, she chose to overlook a competing paper by the Kansas Fed arguing the opposite.

Such a bias towards easy money may contain the seeds of its own destruction if it forces the Fed to slam on the brakes later. But that is a drama for another day. The greater risk for the world over coming months is that China stops trying to hold the line against devaluation, and sends a wave of corrosive deflation through the global economy. Fear that China may join the world’s currency wars is what haunts the elite banks and funds in London. It is why there has been such a neuralgic response to the move this week to let the yuan slip to a five-year low of 6.4260 against the dollar. Bank of America expects the yuan to reach 6.90 next year, setting off a complex chain reaction and a further downward spiral for oil and commodities. Daiwa fears a 20pc slide. My own view is that a fall of this magnitude would set off currency wars across Asia and beyond, replicating the 1998 crisis on a more dangerous scale.

Lest we forget, China’s fixed capital investment has reached $5 trillion a year, as much as in North America and Europe combined. The excess capacity is cosmic. Pressures on China are clearly building up. Capital outflows reached a record $113bn in November. Capital Economics says the central bank (PBOC) probably burned through $57bn of foreign reserves that month defending the yuan peg. A study by the Reserve Bank of Australia calculates that capital outflows reached $300bn in the third quarter, an annual pace of 10pc of GDP. The PBOC had to liquidate $200bn of foreign assets. Defending the currency on this scale is costly. Reserve depletion entails monetary tightening, neutralizing the stimulus from cuts in the reserve requirement ratio (RRR). It makes a “soft landing” that much harder to pull off.

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China is trying to find ways to hide debts and losses…

China Swallows Its Mining Debt Bomb (BBG)

Remember that Bugs Bunny scene where the Tasmanian Devil survives an explosion by eating the bomb? China’s government is trying to do that for its indebted miners. Rather than let the domestic mining industry be dragged down by its $131 billion of debts, the authorities are looking at setting up what amounts to a state-owned “bad bank” to segregate the worst liabilities and allow the remaining businesses to survive. China Minmetals, the metals trader and miner tasked with swallowing up China Metallurgical Group in a state-brokered merger, will be one taker, these people said. That should help with its net debt, which already stood at 136 billion yuan ($22 billion) in December 2014. There’ll be no shortage of others lining up for relief.

Seven of the 17 most debt-laden mining and metals companies worldwide are in China, and all are state-owned or -controlled. Western credit investors have become so chary of miners’ debts that you can pick up bonds with a 100% annual yield if you’re confident the companies will last the year. Anglo American is firing 63 percent of its workforce and selling at least half its mines to cut debt, while Glencore today announced plans to further decrease its borrowings. The political strategist James Carville once joked that he’d like to be reincarnated as the bond market so he could “intimidate everybody.” In China, things are considerably more relaxed. Chalco, one of the top five global aluminum producers, hasn’t generated enough operating income to pay its interest bills in any half-year since 2011. Over the four-year period, interest payments have exceeded earnings by about 29 billion yuan.

It’s a similar picture in China’s coal industry. China Coal Energy, Yanzhou Coal, and Shaanxi Coal, the second-, fourth-, and fifth-biggest domestic producers by sales, have collectively spent 3.3 billion yuan more on interest over the last 12 months than they’ve earned from their operations. This situation can’t go on. While Chalco still has about 47 billion yuan in shareholders’ equity on its balance sheet, it doesn’t have an obvious path back to profitability and most of its excess interest payments were made before aluminum prices started to really slump, back in May. There are also some worrying dates looming: The company has 13.6 billion yuan in bonds maturing next year, and another 20.9 billion yuan in the two years following

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Beijing is trying to centralize control.

China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)

Already massive, China Inc. is about to get bigger—and that may not be good for the country’s economy or consumers. Beijing is considering combining some of its biggest state-owned companies in a move that would tighten its grip over key parts of the world’s No. 2 economy. The government said Tuesday it would merge two of the country’s largest metals companies. Already it has combined train-car makers and nuclear technology firms and is in the process of combining its two largest shipping lines. It is considering combining more companies in areas ranging from telecommunications to air carriers. In recent weeks, shares of major state-owned enterprises like mobile-phone service China Unicom (Hong Kong) and China Telecom and carriers China Southern Airlines and Air China have surged amid speculation they will be next.

China Telecom said it doesn’t comment on speculation, while the others said they haven’t received any information about mergers. Beijing hopes to form national champions that can better compete abroad. But experts say the moves will likely reduce competition, lead to higher prices for consumers and do little to clean up China’s sprawling and largely wasteful portfolio of state-owned enterprises. “China is throwing the gears of reform into reverse,” said Sheng Hong, director of the Unirule Institute of Economics in Beijing, an independent research group. “Unprofitable state-owned companies should be closed, rather than merged,” he said.

[..] Economists say state-owned enterprises are a drag on China’s economy. They enjoy cheap lands, government subsidies and easy access to bank loans. Private firms face barriers to entering sectors such as oil and banking, and state-run companies’ dominance allow them to keep prices high. However, the performance of SOEs has been deteriorating. According to Morgan Stanley, the gap of return-on-assets between SOEs and private enterprises is the widest since the late 1990s. China’s SOEs had an average return-on-assets rate of 4% in 2014, compared with private companies’ 10%, said Kelvin Pang, an analyst at the bank. State-run Economic Information Daily, a newspaper published by the official Xinhua News Agency, reported in April that Beijing was considering merging its biggest state-owned companies to create around 40 national champions from the existing 111.

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“The rule change will cut Chesapeake’s inventory by 45%..” Its market cap will fall right along with it.

Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)

In an instant, Chesapeake Energy will erase the equivalent of 1.1 billion barrels of oil from its books. Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel. Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.

But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years. Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures. “There was too much optimism built into their forecasts,” said David Hughes, a fellow at the Post Carbon Institute. “It was a great game while it lasted.” The rule change will cut Chesapeake’s inventory by 45%, regulatory filings show. Chesapeake’s additional discoveries and expansions will offset some of its revisions, the company said in a third-quarter regulatory filing.

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“The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter..”

Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)

“We are looking at real carnage in the junk bond market,” Jeffrey Gundlach, the bond guru who runs DoubleLine Capital, announced in a webcast on Tuesday. He blamed the Fed. It was “unthinkable” to raise rates, with junk bonds and leveraged loans having such a hard time, he said – as they’re now dragging down his firm’s $80 billion in assets under management. “High-yield spreads have never been this high prior to a Fed rate hike,” he said – as the junk bond market is now in a precarious situation, after seven years of ZIRP and nearly as many years of QE, which made Grundlach a ton of money. When he talks, he wants the Fed to listen. He wants the Fed to move his multi-billion-dollar bets in the right direction. But it’s not a measly quarter-point rate hike that’s the problem. Bond yields move more than that in a single day without breaking a sweat.

The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter, that they should be blindly taken in large quantities without compensation, and that rates would always remain at zero. Those risks that didn’t exist are now coming home to roost. They’re affecting the riskiest parts of the credit spectrum first: lower-rated junk bonds and leveraged loans. Grundlach presumably has plenty of them in his portfolios. Tuesday, the day Grundlach was begging the Fed for mercy, was particularly ugly. The average bid of S&P Capital IQ LCD’s list of 15 large and relatively liquid high-yield bond issues – the “flow-names,” as it calls them, that trade more frequently – dropped 181 basis points to about 87 cents on the dollar, for an average yield of 10%, the worst since July 23, 2009.

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Sign of things to come?!

Banks Buy Protection Against Falling Stock Markets (BBG)

For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks. The pricing anomaly is visible in a value known as skew that measures how much it costs to buy bearish options relative to those that appreciate when shares rise. In 2015, contracts betting on a 10% S&P 500 decline by February have traded at prices averaging 110% more than their bullish counterparts. That compares with a mean premium of 68% since the start of 2005, according to data compiled by Bloomberg.

While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent. “Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,” said Rocky Fishman, an equity derivatives strategist at Deutsche Bank. “The way the marketplace has compensated for that is by driving up S&P skew.”

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They already are…

Dividends Could Be the Next Victim of the Commodity Crunch (BBG)

As commodity prices tumble to the lowest since the global financial crisis, the dividends paid by the world’s largest oil producers and miners look increasingly hard to justify. Take the world’s largest 500 companies by sales. Of the 20 expected to pay the highest dividend yields over the next 12 months, 17 are natural resources companies, according to data compiled by Bloomberg. They include BHP Billiton Ltd., the world’s largest miner, with a yield – or dividend divided by share price – of more than 10% on its London shares. Plains All American Pipeline LP tops the list with a yield of 13.7%. Ecopetrol, Colombia’s largest oil producer, has a payout of 11.6%. That compares with an average among all 500 companies of 3.5%. “Investors are suggesting that dividend rates announced as recently as half-year results are generally not sustainable,” said Jeremy Sussman at Clarksons Platou Securities.

“The current environment is among the toughest we have seen across the resource space, putting increased pressure on management teams to deliver cost savings.” Miners Anglo American and Freeport-McMoran have suspended payments to preserve cash, following Glencore Plc earlier in the year. Eni SpA, Italy’s largest oil producer, and Houston-based pipeline owner Kinder Morgan have both reduced dividends. While other chief executive officers, especially at oil producers like Shell and Chevron have promised to keep paying, investors appear to be pricing in the likelihood of more cuts to come. “The fall in oil companies’ share prices and the increase in the dividend yield to historical levels is signaling that the market is fearing a cut,” Ahmed Ben Salem at Oddo & Cie in Paris, said by e-mail.

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They should have seen it coming when oil collapsed.

Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry. But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days. Crude oil crumbled below $37 a barrel on Tuesday for the first time since February 2009. The situation is so bad that this week the Bloomberg Commodity Index, which tracks a wide swath of raw materials, plummeted to its weakest level since June 1999. “Sentiment is horrendous. It’s the worst since the financial crisis – and it’s getting worse every day,” said Garrett Nelson, a BB&T analyst who covers the metals and mining industry.

There was fresh evidence of the sector’s financial stress from De Beers owner Anglo American. The mining giant said it was suspending its dividend and selling off 60% of its assets, which could lead to a reduction of 85,000 jobs. The commodities rout is knocking stock prices, with the Dow falling over 200 points so far this week. It’s also raising concerns about the state of the global economy. “Markets are in the midst of another global growth scare,” analysts at Bespoke Investment Group wrote in a recent report. Soft demand is clearly not helping commodity prices. China and other emerging markets like Brazil have slowed dramatically in recent quarters, lowering their appetite for things like steel, iron ore and crude oil.

More developed markets don’t look great either. Europe’s economy continues to underperform, Japan is barely avoiding recession and U.S. manufacturing activity contracted in November for the first time in three years. But the real driver of the recent commodity crash is on the supply side, compared to the collapse in demand during the Great Recession. Cheap borrowing costs and an inability to predict China’s slowdown led producers to expand too much in recent years. Now they’re flooding the market with too much supply. “There’s a lot of froth and excess production capacity that needs to go away permanently. It’s hard to imagine we’re not in a low-commodity price environment for a fairly long time,” said Nelson.

That means you should brace for more plant closure and announcements like the one announced by Anglo American. In the U.S., roughly 123,000 jobs have disappeared from the mining sector, which includes oil and energy workers, since the end of 2014, according to government statistics. It’s also likely some companies won’t survive the depressed pricing environment. Financial trouble for commodity companies have already lifted global corporate defaults to the highest level since 2009, according to Standard & Poor’s.

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Debt addicts getting their fix wherever they can.

US Companies Turn To European Debt Markets (FT)

US tyremaker Goodyear Dunlop sold a €250m eight-year euro-denominated bond on Wednesday – its first such deal in four years – as US companies raise record amounts in the eurozone. The sale was the latest example of a reverse Yankee — euro-denominated debt issued by US companies. US companies have been the biggest issuers of euro bonds by nationality this year. Last week Ball Corporation, an avionics and packaging company, issued euro and dollar bonds to fund its acquisition of Rexam, a UK drinks maker. “Given the recent [US] disruption, the European market looks more positive,” said Henrik Johnsson, head of the Emea debt syndicate at Deutsche Bank. Diverging monetary policy has reduced the cost of issuing debt in euros as the European Central Bank continues to ease while the Federal Reserve is expected to increase its main interest rate from near zero this month.

Previously companies would issue debt in euros and convert it back into dollars. But the strong dollar has increased the cost of doing this. Many reverse Yankee issuers have significant euro-denominated cash flows and so have a “natural hedge” against exchange rate movements. The sell-off in the debt of US commodity companies – particularly in the energy sector – had been damaging for dollar credit, said Mr Johnsson. “As a matter of investor psychology, you’re not seeing losses in significant portions of your portfolio every day in Europe. It’s the same with fund flows, Europe is consistently receiving inflows.” Market participants expect the trend to continue into next year as successful deals demonstrate the depth of Europe’s markets. US companies have also issued a record amount in dollars, however.

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“In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans.”

Italy Needs a Cure for Its Bad-Debt Headache (BBG)

Italy’s economy dragged itself out of recession this year, posting annual growth in GDP of 0.8% in the third quarter. That, though, was only half the pace achieved by the euro zone as a whole. And unless the Italian government gets serious about tackling the bad debts that are crushing the nation’s banking system, its economy will continue to underperform its peers. Economists are only mildly optimistic about Italy’s prospects next year. The consensus forecast is that growth will peak at 1.3% this quarter, slowing for the first three quarters of next year before rallying back to that high by the end of the year. One of the biggest drags on the country’s growth is the sheer volume of non-performing loans, typically defined as debts that have been delinquent for 90 days or more.

Italy’s bad loans have soared to more than €200 billion, a fourfold increase since the end of 2008. Moreover, more and more borrowers have fallen behind even as the economic backdrop has improved. That’s in sharp contrast with Spain, where bad loans peaked at the start of 2014 and have since declined by almost a third. The figures for Italy are even more worrying when you compare them with the growth environment. The burden of bad debts is approaching half of what the economy delivers every three months. In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans. If that trend continues, Italy will soon be in a worse position than Spain, even though its economy is 50% bigger.

Here’s the rub: If a euro zone country’s banks are weighed down with bad debts, the ECB’s attempt to boost growth and consumer prices by channeling billions of euros into the economy through its quantitative easing program are doomed to failure. And it’s pretty clear that domestic investment in Italy isn’t showing any evidence of recovery despite the ECB’s best efforts.

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“The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway?”

Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)

As of January 1, 2016, Switzerland is handing over the names of everyone who has anything stored in its Swiss freeport customs warehouses. For decades, people have stored precious metals and art in Swiss custom ports — tax-free — as long as they did not take it into Switzerland. Now any hope on trusting Switzerland is totally gone. That’s right — the Swiss handed over everyone with accounts in its banks. Now, they must report the name, address, and item descriptions of anyone storing art in its tax-free custom ports. This also applies to gold, silver, and other precious metals along with anything else of value. Back in 1986, the FBI walked into my office to question me about where Ferdinand Marcos (1917–1989) stored the gold he allegedly stole from the Philippines.

Marcos had been the President of the Philippines from 1965 to 1986 and had actually ruled under martial law from 1972 until 1981. I told them that I had no idea. They never believed me, as always, and pointed out that Ferdinand Marcos was a gold trader before he became president and he made his money as a trader. They told me he was a client and that I had been on the VIP list for the grand opening of Herald Square in NYC, which he funded through a Geneva family. I explained that I never met him, and if he were a client, he must have used a different name. But the rumor was that the gold was stored in the Zurich freeport customs warehouse. His wife, Imelda, was famous for her extravagant displays of wealth that included prime New York City real estate, world-renowned art, outlandish jewelry, and more than a thousand pairs of shoes.

Reportedly, there is a diamond tiara containing a giant 150-carat ruby that is locked up in a vault at the Swiss central bank. Some have valued it at more than US$8 million. The missing gold that people have spent 30 years searching for will surface if there are mandatory reports on whatever is hidden in the dark corners of these warehouses. This action to expose whatever whomever has everywhere in Switzerland may cause many to just sell since they will be taxed by their governments for daring to have private assets. They will not be able to get it out once it sees the light of day for every government is watching.

The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway? This is what bureaucrats are for. They act on their own circumventing the people. Welcome to the New Age of hunting for loose change. Your sofa and car glove box are next. Oh yeah – what about gold or silver fillings in your mouth? Time to see the dentist?

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Good to know one’s history.

Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)

There are some things you might not know about Greek immigration to the United States. This history becomes particularly relevant when watching today’s news and political candidates like Donald Trump, supported by huge and vociferous crowds, call for the complete ban of people from entering the United States based on their race or religion. This is nothing new. In fact– today’s “undesirable” Muslims (in Donald Trump’s eyes), were yesteryear’s Greeks. It’s a forgotten history— something that only occasionally comes up by organizations like AHEPA or the occasional historian or sociologist. In fact, many Greek Americans are guilty of not only perpetuating— but also creating— myths of our ancestors coming to this country and being welcomed with open arms.

A look back at history will prove that this usually wasn’t the case for the early Greek immigrants to the United States. Greeks, their race and religion, were seen as “strange” and “dangerous” to America and after decades of open discrimination, Greeks were finally barred— by law— from entering the United States in large numbers. The Immigration Act of 1924 imposed harsh restrictions on Greeks and other non-western European immigrant groups. Under that law, only one hundred Greeks per year were allowed entry into the United States as new immigrants. Much like today, when politicians and activists like Donald Trump use language against a particular ethnic group— like his call to ban all Muslims from entering the United States, the same was the case a hundred years ago. Except then, Greeks were one of the main targets.

There was a strong, loud and active “nativist” movement that was led by people who believed they were the “true Americans” and the immigrants arriving— mainly Greeks, Italians, Chinese and others who were deemed “different” and even “dangerous” to American ideals, were unfit to come to America. As early as 1894 a group of men from Harvard University founded the Immigration Restriction League (IRL), proponents of a United States that should be populated with “British, German and Scandinavian stock” and not by “inferior races.” Their biggest targets were Greeks and Italians and the group had a powerful influence with the general public and leaders in the U.S. government in their efforts to keep “undesirables” out of America.

The well-known cartoon “The Fool Pied Piper” by Samuel Erhart appeared in 1909 portraying Uncle Sam as the Pied Piper playing a pipe labeled “Lax Immigration Laws” and leading a horde of rats labeled “Jail Bird, Murderer, Thief, Criminal, Crook, Kidnapper, Incendiary, Assassin, Convict, Bandit, Fire Brand, White Slaver, and Degenerate” toward America. Some rats carry signs that read “Black Hand,” referring to the Italian Mafia. In the background, rulers from France, Russia, Germany, Italy, Austria-Hungary, Turkey and Greece celebrate the departure of the fleeing rats.

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“..Trump does have something very much in common with everybody else. He watches TV….”

It’s Too Late to Turn Off Trump (Matt Taibbi)

[..] in Donald Trump’s world everything is about him, but Trump’s campaign isn’t about Trump anymore. With his increasingly preposterous run to the White House, the Donald is merely articulating something that runs through the entire culture. It’s hard to believe because Trump the person is so limited in his ability to articulate anything. Even in his books, where he’s allegedly trying to string multiple thoughts together, Trump wanders randomly from impulse to impulse, seemingly without rhyme or reason. He doesn’t think anything through. (He’s brilliantly cast this driving-blind trait as “not being politically correct.”) It’s not an accident that his attention span lasts exactly one news cycle. He’s exactly like the rest of America, except that he’s making news, not following it – starring on TV instead of watching it.

Just like we channel-surf, he focuses as long as he can on whatever mess he’s in, and then he moves on to the next bad idea or incorrect memory that pops into his head. Lots of people have remarked on the irony of this absurd caricature of a spoiled rich kid connecting so well with working-class America. But Trump does have something very much in common with everybody else. He watches TV. That’s his primary experience with reality, and just like most of his voters, he doesn’t realize that it’s a distorted picture. If you got all of your information from TV and movies, you’d have some pretty dumb ideas. You’d be convinced blowing stuff up works, because it always does in our movies. You’d have no empathy for the poor, because there are no poor people in American movies or TV shows – they’re rarely even shown on the news, because advertisers consider them a bummer.

Politically, you’d have no ability to grasp nuance or complexity, since there is none in our mainstream political discussion. All problems, even the most complicated, are boiled down to a few minutes of TV content at most. That’s how issues like the last financial collapse completely flew by Middle America. The truth, with all the intricacies of all those arcane new mortgage-based financial instruments, was much harder to grasp than a story about lazy minorities buying houses they couldn’t afford, which is what Middle America still believes. Trump isn’t just selling these easy answers. He’s also buying them.

Trump is a TV believer. He’s so subsumed in all the crap he’s watched – and you can tell by the cropped syntax in his books and his speech, Trump is a watcher, not a reader – it’s all mixed up in his head. He surely believes he saw that celebration of Muslims in Jersey City, when it was probably a clip of people in Palestine. When he says, “I have a great relationship with the blacks,” what he probably means is that he liked watching The Cosby Show. In this he’s just like millions and millions of Americans, who have all been raised on a mountain of unthreatening caricatures and clichés. TV is a world in which the customer is always right, especially about hard stuff like race and class. Trump’s ideas about Mexicans and Muslims are typical of someone who doesn’t know any, except in the shows he chooses to watch about them.

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“Unless Russia can wake up Europe, war is inevitable.”

War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)

[..] Washington is not opposed to terrorism. Washington has been purposely creating terrorism for many years. Terrorism is a weapon that Washington intends to use to destabilize Russia and China by exporting it to the Muslim populations in Russia and China. Washington is using Syria, as it used Ukraine, to demonstrate Russia’s impotence to Europe— and to China, as an impotent Russia is less attractive to China as an ally. For Russia, responsible response to provocation has become a liability, because it encourages more provocation. In other words, Washington and the gullibility of its European vassals have put humanity in a very dangerous situation, as the only choices left to Russia and China are to accept American vassalage or to prepare for war.

Putin must be respected for putting more value on human life than do Washington and its European vassals and avoiding military responses to provocations. However, Russia must do something to make the NATO countries aware that there are serious costs of their accommodation of Washington’s aggression against Russia. For example, the Russian government could decide that it makes no sense to sell energy to European countries that are in a de facto state of war against Russia. With winter upon us, the Russian government could announce that Russia does not sell energy to NATO member countries. Russia would lose the money, but that is cheaper than losing one’s sovereignty or a war. To end the conflict in Ukraine, or to escalate it to a level beyond Europe’s willingness to participate, Russia could accept the requests of the breakaway provinces to be reunited with Russia.

For Kiev to continue the conflict, Ukraine would have to attack Russia herself. The Russian government has relied on responsible, non-provocative responses. Russia has taken the diplomatic approach, relying on European governments coming to their senses, realizing that their national interests diverge from Washington’s, and ceasing to enable Washington’s hegemonic policy. Russia’s policy has failed. To repeat, Russia’s low key, responsible responses have been used by Washington to paint Russia as a paper tiger that no one needs to fear. We are left with the paradox that Russia’s determination to avoid war is leading directly to war. Whether or not the Russian media, Russian people, and the entirety of the Russian government understand this, it must be obvious to the Russian military.

All that Russian military leaders need to do is to look at the composition of the forces sent by NATO to “combat ISIS.” As George Abert notes, the American, French, and British aircraft that have been deployed are jet fighters whose purpose is air-to-air combat, not ground attack. The jet fighters are not deployed to attack ISIS on the ground, but to threaten the Russian fighter-bombers that are attacking ISIS ground targets. There is no doubt that Washington is driving the world toward Armageddon, and Europe is the enabler. Washington’s bought-and-paid-for-puppets in Germany, France, and UK are either stupid, unconcerned, or powerless to escape from Washington’s grip. Unless Russia can wake up Europe, war is inevitable.

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Europe’s creating no man’s land.

Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Police on Wednesday rounded up some 2,300 migrants from a makeshift camp near the border with the Former Yugoslav Republic of Macedonia and put them on buses to Athens, where they are to be put up in temporary reception facilities, including two former Olympic venues. The police operation, which Greek authorities heralded last week, was carried out relatively smoothly following weeks of tensions along the border. A group of 30 migrants who initially resisted efforts by police to remove them from the camp on Wednesday morning were briefly detained before being put on a bus to the capital. A total of 45 buses were used to transfer the migrants from a makeshift camp in Idomeni and the surrounding area to the capital, according to a police statement which said most the migrants are from Pakistan, Somalia, Morocco, Algeria and Bangladesh.

The migrants are to be put up in former Olympic venues in Elliniko and Galatsi and in a temporary reception facility for immigrants that opened in Elaionas over the summer. Police officers on Wednesday were stopping buses heading toward Idomeni with more migrants from the Aegean islands and conducting checks. All migrants that are not from Iraq, Afghanistan and Syria – the nationalities that FYROM border guards are allowing to pass – were being taken off the buses and sent to Athens, the official said. Complicating matters, FYROM police were said to have started building a second fence on the Balkan country’s frontier with Greece in a bid to keep out migrants trying to slip through.

The crackdown on the Greek-FYROM border is expected to lead to a buildup of migrants in Greece and encourage traffickers to resort to new routes to Europe. The United Nations refugee agency (UNHCR) indicated on Wednesday that an alternative route traffickers are likely to favor could be via Albania, Montenegro, Croatia and Bosnia.

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Dec 092015
 
 December 9, 2015  Posted by at 9:38 am Finance Tagged with: , , , , , , , ,  1 Response »
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Dorothea Lange Refugees: Drought hit OK farm family on way to CA Aug 1936

When It Rains It Pours as China Unleashes Commodity Torrent (BBG)
Oil Producers Prepare For Prices To Halve To $20 A Barrel (Guardian)
Anglo American To Slash Workforce By 85,000 Amid Commodity Slump (Guardian)
OPEC Provides Economic Stimulus Central Bankers Can’t or Won’t (BBG)
Copper Meltdown Burning Miners Is Boon to Builders as Costs Sink (BBG)
Iron Ore in $30s Seen Near Tipping Point for Largest Miners (BBG)
Emerging Markets Warned of Capital Drought as Fed Nears Liftoff (BBG)
China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade (BBG)
The IMF Forgives Ukraine’s Loan To Russia (Michael Hudson)
Tension Grows Between Tsipras, Schaeuble Over IMF Role In Greek Program (Kath.)
Schaeuble Fights EU Deposit Insurance Plan in Clash With ECB (BBG)
Australian Police Raid Sydney Home Of Reported Bitcoin Creator (Reuters)
Australian Housing Boom Leaves Swath of Empty Properties (BBG)
Germany Takes In More Refugees In 2015 Than US Has In Past 10 Years (Quartz)
How Germany’s Right-Wing Tabloid Bild Learned to Love Refugees (BBG)
6 Afghan Migrant Children Drown Off Turkish Coast On Way To Greece (AP)
11 Refugees, Including 5 Children, Drown Near Greek Island, 13 Missing (GR)

Note: total Chinese exports have fallen for 5 months now. While commodity exports are rising fast. So outside of commodities, the fall in exports is that much bigger.

When It Rains It Pours as China Unleashes Commodity Torrent (BBG)

There’s no let-up in the onslaught of commodities from China. While the country’s total exports are slowing in dollar terms, shipments of steel, oil products and aluminum are reaching for new highs, according to trade data from the General Administration of Customs. That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas. The flood is compounding a worldwide surplus of commodities that’s driven returns from raw materials to the lowest since 1999, threatening producers from India to Pennsylvania and aggravating trade disputes. While companies such as India’s JSW Steel decry cheap exports as unfair, China says the overcapacity is a global problem.

“It puts global commodities producers in a bad situation as China struggles with excess supplies of base metals, steel and oil products,” Kang Yoo Jin at NH Investment & Securities said. “The surplus of commodities is becoming a real pain for China and to ease the glut, it’s increasing its shipments overseas.” Net fuel exports surged to an all-time high of 2.22 million metric tons in November, 77% above the previous month, customs data showed. Aluminum shipments jumped 37% to the second-highest level on record while sales of steel products climbed 6.5%, taking annual exports above 100 million tons for the first time. Chinese oil refiners are tapping export markets to reduce swelling fuel stockpiles, particularly diesel. The nation is also encouraging overseas shipments by allowing independent plants to apply for export quotas to sustain refining operation rates and ease an economic slowdown, according to Yuan Jun at oil trader China Zhenhua Oil.

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A boon for the economy, you said?

Oil Producers Prepare For Prices To Halve To $20 A Barrel (Guardian)

The world’s leading oil producers are preparing for the possibility of oil prices halving to $20 a barrel after a second day of financial market turmoil saw a fresh slide in crude, the lowest iron ore prices in a decade, and losses on global stock markets. Benchmark Brent crude briefly dipped below $40 a barrel for the first time since February 2009 before speculators took profits on the 8% drop in the cost of crude since last week’s abortive attempt by the oil cartel Opec to steady the market. But warnings by commodity analysts that the respite could be shortlived were underlined when Russia said it would need to make additional budget cuts if the oil price halved over the coming months.

Alexei Moiseev, Russia’s deputy finance minister, told Reuters: “If oil goes to $20, we will need to do additional [spending] cuts. Clearly we have shown that we are very willing to cut fiscal spending in line with an oil price at $60, for example. In order for us to be long-term sustainable [with the] oil price at $40, we need to do additional cuts, but if the oil price goes to $20 we need to do even more cuts.” Russia and Saudi Arabia – the world’s two biggest oil producers – both increased spending when oil prices rose to well above $100 a barrel. The fall from a recent peak of $115 a barrel in August 2014 has left all Opec members in financial difficulty, but Saudi Arabia has refused to relent on a strategy of using a low crude price to knock out US shale producers.

Hopes that Opec would announce production curbs to push prices up were dashed when the cartel met in Vienna last Friday, triggering the latest downward lurch in the cost of oil. Lord Browne, the former chief executive of BP, refused to rule out the possibility that oil could halve again in price when he was interviewed by Bloomberg TV. Asked if oil could hit $20 a barrel, Browne – who ran BP from 1995 to 2007 during a period when the cost of crude rose from $10 to $100 a barrel, said in the short term nothing was impossible. He added: “In the long run, $20 is probably wrong, but that’s as far as I’d go.”

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Some jobs to be transferred to new owners of assets Anglo sells off.

Anglo American To Slash Workforce By 85,000 Amid Commodity Slump (Guardian)

Anglo American has suspended its dividend and announced plans to cut its workforce by 85,000 and dispose of more than half its mines in response to the plunging price of iron ore and other metals. The UK mining company said it would not pay a dividend for the second half of this year and all of next year. The last time Anglo American cut its dividend was during the worst of the financial crisis in 2009. In a presentation to investors, Anglo American said it would sell or close up to 35 mines, leaving it with about 20 sites and cutting employee and contractor numbers from 135,000 to fewer than 50,000 after 2017. It will halve the number of business units from six to three: the De Beers diamond operation, industrial metals and bulk commodities.

The company, which mines materials such as iron ore, manganese, coal, copper and nickel, said it would cut capital spending by a further $1bn (£670m) to the end of 2016, taking the reduction in capital spending to $2.9bn by the end of 2017. It increased the amount it plans to raise from asset sales to $4bn from $3bn. The plan is the biggest restructuring by a mining company in reaction to the commodities rout. Prices have plunged because of slowing world economic growth and falling demand from China, the world’s biggest consumer of iron ore, copper, nickel and most other commodities. Anglo American’s shares, which have lost almost three-quarters of their value this year, fell more than 12% to a new all-time low of 323p.

Its announcement sent all other mining shares down in London with the sector at a 10-year low. The biggest mining companies are slashing spending and cutting costs to protect their financial strength as metal prices plunge. Glencore, the British miner and commodities trader, has suspended its dividend and is selling assets to cut its debt in an effort to rebuild investor confidence. Anglo American has been affected more severely by the commodities crash than some of its rivals because of its reliance on iron ore, whose value has fallen by almost 40% this year as demand from China has fallen.

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The commodities dump puts the entire global economy in jeopardy and Bloomberg says it’s all great. “..the world has enjoyed a windfall equivalent to 2% of GDP it would otherwise have spent on crude..” The crude does come from the world, though, right?

OPEC Provides Economic Stimulus Central Bankers Can’t or Won’t (BBG)

The world’s central bankers just got a helping hand from the world’s oil ministers. As the ECB delivers less monetary stimulus than investors sought and with the Federal Reserve set to tighten next week, the world economy may find support instead from the weakest oil price in more than six years. West Texas Intermediate is trading at about $40 a barrel four days after OPEC chose not to limit output, extending the commodity’s decline from its June 2014 peak of $107.73 and this year’s high of $62.58 in May. While its earlier slide failed to provide the economic pickup some anticipated, economists at UniCredit, Commerzbank and Societe Generale are still banking on cheaper fuel to spur spending by consumers and companies in 2016.

“On net, central bankers should take this as a positive,” said Peter Dixon, an economist at Commerzbank in London. “This does help to stimulate demand by leaving a little bit of money in the pocket and providing a feel-good factor.” At Societe Generale, Michala Marcussen, global head of economics, reckons every $10 drop in the price of oil lifts global growth by 0.1 percentage point. She estimates that since 2014, the world has enjoyed a windfall equivalent to 2% of GDP it would otherwise have spent on crude. “Our biggest relief last week was that OPEC decided no output cut, promising consumers inexpensive oil for longer,” said Marcussen. Even though falling oil may weaken the inflation rates central bankers are struggling to lift, Erik Nielsen at UniCredit said it was important to recognize that it’s “‘good’ disinflation, because it stems from supply rather than demand and so should raise real income, thereby propelling consumption and the recovery.”

“A drop in energy prices is the equivalent of a tax cut, with no implications for debt,” he said, adding that faster expansions as a result should end up bolstering prices too and so investors should be wary of wagering on a deterioration in inflation.

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That sounds very similar to what they said about cheaper oil, and we said from the get-go it wouldn’t work out well. Besides, copper producers? There’s no production, it’s mining. There’s some ‘purification’ involved, but no ‘production’. Like a refinery doesn’t ‘produce’ oil. BTW, that’s one mighty ugly graph.

Copper Meltdown Burning Miners Is Boon to Builders as Costs Sink (BBG)

Copper producers from Glencore to Freeport-McMoRan spent most of this year getting slammed by the metal’s worst slump since the recession. But there are some folks who are cheering. With prices heading for a third straight annual decline, the rout is a welcome reprieve for metal buyers like electricians and builders who put about 400 pounds (181 kilograms) of copper into the average U.S. home. As recently as 2011, copper traded in New York was at all-time-highs, after more than five-fold gains in the previous decade. Now, with demand growth cooling in China, the biggest user, global surpluses have emerged. “Business has been so much better – the best in about 10 years,” said David Chapin, the president Willmar Electric Service, a Minnesota-based company that spends about $1 million a year on copper wire it installs for clients in several Midwest states.

While that’s only 5% of Willmar’s total costs, cheaper metal is boosting profit on projects that a few years ago were close to being money losers, Chapin said. On the Comex, copper futures fell 28% this year to $2.048 a pound and are heading for the biggest annual retreat since 2008. The metal touched $2.002 on Nov. 23, a six-year low. Prices haven’t traded below $2 since 2009. Copper’s role in construction and architecture dates as far back as ancient Egypt, where temple doors were clad with the metal, according to the Copper Development Association. In modern times, the commodity’s conductive properties and it’s resistance to corrosion have made it sought after for pipes and wires. Globally, construction accounts for about 30% of demand, Bloomberg Intelligence data show. The transportation industry makes up about 13%, including for use in cars and trucks.

Richardson, Texas-based Lennox International Inc., which makes and markets heating and cooling equipment, said on an Oct. 19 earnings call that cheaper metals and commodities provided a benefit of $15 million to earnings in 2015. There’s about 50 pounds of copper in the average air-conditioning unit. “The winner here will be anyone who purchases and uses copper,” Dane Davis, a metals analyst at Barclays Plc in New York, said in a telephone interview. “The construction industry stands to benefit from cheaper copper pipes. On a national scale, automobile producers are also going to be winners because it’s an important part of car production.”

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As commodities prices sink, so does the market cap of these huge corporations.

Iron Ore in $30s Seen Near Tipping Point for Largest Miners (BBG)

Iron ore’s tumble into the $30s threatens the world’s biggest miners as prices approach break-even costs, according to Capital Economics. BHP Billiton shares slumped to the lowest in 10 years and Rio Tinto dropped to the lowest since 2009. The most expensive operations at the four largest suppliers are on the verge of making losses at rates below $40 a metric ton, said John Kovacs at Capital Economics in London, who estimates their break-even levels at $28 to $39, taking into account freight and other costs. While these producers will keep output strong, they’ll be constrained by low prices, he said. Iron ore’s plunge below $40 comes as producers including Vale in Brazil and Rio and BHP in Australia press on with expansions to cut costs and defend market share just as demand from the largest consumer China slows.

They’re the world’s biggest suppliers along with Fortescue. Prices of the raw material have lost 45% this year and have plunged 80% from their peak in 2011. “The big four will find it hard to maintain output at below $40,” Kovacs said in response to questions. “If prices remain weak, output from the highest-cost mines of the big four will be under pressure.” Ore with 62% content delivered to Qingdao sank 1.1% to $38.65 a dry ton on Monday, a record low in daily prices compiled by Metal Bulletin Ltd. dating back to May 2009. The raw material peaked at $191.70 in 2011. Kovacs said that while rates will stay low over the next year, he doesn’t believe they’ll remain below $40 for a significant length of time. He expects prices to recover slowly because demand won’t fall much further and the biggest miners will find it difficult to keep up output at these levels.

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Oh, you think they couldn’t figure out that one by themselves?

Emerging Markets Warned of Capital Drought as Fed Nears Liftoff (BBG)

A sudden capital drought in emerging markets could undermine the fragile global expansion, World Bank economists said in a report Tuesday that questions whether the international lender’s main poverty-reduction target is achievable given the bleaker outlook. Now in its sixth year, the slowdown in developing economies is the broadest since the 1980s, World Bank economists said in a research paper released on Tuesday. While emerging nations are better prepared for shocks than they were in the 1980s and 1990s, the recent “rough patch” could signal a new era of slow growth, according to the Washington-based development bank. Even worse, a surge in financial turbulence could cause capital flows into emerging markets to dry up, the World Bank said.

Net capital flows in emerging markets have been declining since last year and stalled to zero in the first half of 2015. The warning comes a little over a week before what investors expect will be the U.S. Federal Reserve’s first increase in its benchmark borrowing rate since 2006. Tightening financial conditions and a slump in commodity prices have hurt resource-rich emerging markets such as Russia and Brazil, a nation which Goldman Sachs has warned may be on the verge of a depression. “Deteriorating external conditions, perhaps resulting from U.S monetary policy tightening or elevated uncertainty about growth prospects in a major emerging market, could potentially combine with domestic factors into a ‘perfect storm’ by sparking a sudden stop in capital inflows to multiple emerging markets,” the World Bank said in the paper.

World Bank President Jim Yong Kim has made it part of the institution’s mission to reduce extreme poverty – living on less than $1.90 a day – to 3% of the world’s population. That milestone will be a challenge to reach “under most plausible scenarios,” the report stated. “In light of the significant global risks going forward, emerging markets urgently need to put in place an appropriate set of policies to address their cyclical and structural challenges and promote growth,” the authors wrote. The report’s authors cite a number of reasons for the slowdown, including weak global trade, the commodities slump as demand from China has weakened, and slowing productivity growth in emerging economies..

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Lowballing.

China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade (BBG)

China’s illicit financial outflows were estimated at almost $1.4 trillion over a decade, the largest amount for any developing nation, as money exited the country through channels including fake documentation on trade deals. The estimate for the 10 years through 2013 was published Wednesday by Global Financial Integrity, a Washington-based group researching cross-border money transfers. The study is based on data reported to the IMF and covers money which GFI believes to be illegally earned, transferred or utilized. Money flowing out of China this year has helped to pump up property markets from Sydney to Vancouver, while prospects for a weaker yuan may drive more cash abroad.

On Wednesday, China cut the currency’s reference rate to the weakest since 2011. The bulk of $7.8 trillion of illicit money that exited developing nations over the 10-year period was disguised as trade through fake invoicing, the report said. That’s a method that was highlighted in China in 2013 when the government cracked down on false documentation that was hiding money flows and distorting the nation’s trade data. While citizens are officially limited to converting $50,000 per person a year, a range of tools exist for getting around that restriction, from pooling quotas to transactions through so-called underground banks.

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“..on Tuesday, the IMF joined the New Cold War..”

The IMF Forgives Ukraine’s Loan To Russia (Michael Hudson)

On December 8, the IMF’s Chief Spokesman Gerry Rice sent a note saying: “The IMF’s Executive Board met today and agreed to change the current policy on non-toleration of arrears to official creditors. We will provide details on the scope and rationale for this policy change in the next day or so.” Since 1947 when it really started operations, the World Bank has acted as a branch of the U.S. Defense Department, from its first major chairman John J. McCloy through Robert McNamara to Robert Zoellick and neocon Paul Wolfowitz. From the outset, it has promoted U.S. exports – especially farm exports – by steering Third World countries to produce plantation crops rather than feeding their own populations. (They are to import U.S. grain.) But it has felt obliged to wrap its U.S. export promotion and support for the dollar area in an ostensibly internationalist rhetoric, as if what’s good for the United States is good for the world.

The IMF has now been drawn into the U.S. Cold War orbit. On Tuesday it made a radical decision to dismantle the condition that had integrated the global financial system for the past half century. In the past, it has been able to take the lead in organizing bailout packages for governments by getting other creditor nations – headed by the United States, Germany and Japan – to participate. The creditor leverage that the IMF has used is that if a nation is in financial arrears to any government, it cannot qualify for an IMF loan – and hence, for packages involving other governments. This has been the system by which the dollarized global financial system has worked for half a century. The beneficiaries have been creditors in US dollars.

But on Tuesday, the IMF joined the New Cold War. It has been lending money to Ukraine despite the Fund’s rules blocking it from lending to countries with no visible chance of paying (the “No More Argentinas” rule from 2001). With IMF head Christine Lagarde made the last IMF loan to Ukraine in the spring, she expressed the hope that there would be peace. But President Porochenko immediately announced that he would use the proceeds to step up his nation’s civil war with the Russian-speaking population in the East – the Donbass. That is the region where most IMF exports have been made – mainly to Russia. This market is now lost for the foreseeable future. It may be a long break, because the country is run by the U.S.-backed junta put in place after the right-wing coup of winter 2014. Ukraine has refused to pay not only private-sector bondholders, but the Russian Government as well.

This should have blocked Ukraine from receiving further IMF aid. Refusal to pay for Ukrainian military belligerence in its New Cold War against Russia would have been a major step forcing peace, and also forcing a clean-up of the country’s endemic corruption. Instead, the IMF is backing Ukrainian policy, its kleptocracy and its Right Sector leading the attacks that recently cut off Crimea’s electricity. The only condition on which the IMF insists is continued austerity. Ukraine’s currency, the hryvnia, has fallen by a third this years, pensions have been slashed (largely as a result of being inflated away), while corruption continues unabated.

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Wolfie’s back…

Tension Grows Between Tsipras, Schaeuble Over IMF Role In Greek Program (Kath.)

Tension between Greece and its lenders grew on Tuesday when German Finance Minister Wolfgang Schaeuble seized on comments by Greek Prime Minister Alexis Tsipras regarding the involvement of the International Monetary Fund in the Greek bailout program. During a TV interview on Monday night, Tsipras indicated that he is not keen on the IMF joining the program because of the demands it is likely to make. “The Fund must decide if it wants a compromise, if it will remain a part of the program,” said Tsipras. “If it does not want to, it should come out publicly and say so.” Speaking on the sidelines of yesterday’s Ecofin meeting, Schaeuble slammed Tsipras’s stance. “It is not in Greece’s interests for it to question the IMF’s involvement in the bailout program,” he said.

“I believe we negotiated at length with Mr Tsipras in July and August,” added Schaeuble. “I also believe that he signed the agreement and then held elections to get a mandate from the Greek people so he could implement what he signed.” The German finance minister also indicated that he has the impression Tsipras is having second thoughts about adopting some of the measures demanded by Greece’s lenders. “They should focus their attention on doing what they have to do,” he said. “As always, they are behind schedule. Maybe questioning the agreement is necessary for domestic reasons; he has a slim majority I have noticed. This may be the easy route but it is not in Greece’s interests.”

Schaeuble’s comments prompted an immediate response from Athens. “We remind that the Greek government is responsible for deciding what is in the country’s interests,” said government spokeswoman Olga Gerovasili. “We expect the German Finance Ministry to separate its stance from the unacceptably tough stance of the IMF,” she added. “Europe should and is able to solve its problems on its own.” Greek government sources believe that Schaeuble’s comments indicate there is a split within the German government over Greece.

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…and he’s picking fights wherever he can see them…

Schaeuble Fights EU Deposit Insurance Plan in Clash With ECB (BBG)

German Finance Minister Wolfgang Schaeuble lashed out at plans for joint European deposit insurance, saying the proposal threatens central-bank independence and may be illegal under European Union treaties. Schaeuble’s comments on Tuesday pitted him against officials from the ECB, Italy and Ireland during a public discussion that underscored disputes holding up shared deposit backing, including how to address the risks of government bonds on banks’ balance sheets. The ECB “strongly” supports the European Commission’s plan to introduce common deposit insurance over eight years, ECB Vice President Vitor Constancio said. Schaeuble countered that sovereign risk weighs down banks in too many nations, which shouldn’t benefit from more joint insurance until that’s been addressed.

In addition, the ECB is breaching the barrier between monetary policy and its new bank-oversight goals, he said. “There must be a clear Chinese wall or at least a division by primary law between banking supervision and monetary policy,” said Schaeuble, who called for a treaty change on the ECB’s role and questioned whether current treaties allow deposit insurance as envisaged. As European banks are generally allowed to treat sovereign debt on their balance sheets as free of default risk, any move to add risk weighting or limit such holdings could cause shocks.

In Tuesday’s debate, Constancio called for working globally to address the sovereign-risk question to avoid market disruptions. The European Commission’s proposal would apply to euro-area countries and any others that want to join. Schaeuble’s calls for risk reduction won more allies than his legal questions about the EU proposal. Finnish Finance Minister Alexander Stubb said his view of the legal issues was “a little bit softer” than Schaeuble’s, though risks needed to be addressed before deposit insurance moves ahead. Dutch Finance Minister Jeroen Dijsselbloem called for concrete plans on how to limit banking risks.

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Hours after his identity is suggested in the press, his home is raided. But that has nothing to do with each other?

Australian Police Raid Sydney Home Of Reported Bitcoin Creator (Reuters)

Australian Federal Police raided the Sydney home on Wednesday of a man named by Wired magazine as the probable creator of cryptocurrency bitcoin, a Reuters witness said. The property is registered under the Australian electoral role to Craig Steven Wright, whom Wired outed as the likely real identity of Satoshi Nakamoto, the pseudonymous figure that first released bitcoin’s code in 2009. More than a dozen federal police officers entered the house, on Sydney’s north shore, on Wednesday after locksmiths broke open the door. When asked what they were doing, one officer told a Reuters reporter that they were “clearing the house”.

The Australian Federal Police said in a statement that the officers’ “presence at Mr. Wright’s property is not associated with the media reporting overnight about bitcoins”. The AFP referred all inquiries about the raid to the Australian Tax Office, which did not immediately respond to requests for comment. The police raid in Australia came hours after Wired magazine and technology website Gizmodo published articles saying that their investigations showed Wright, who they said was an Australian academic, was probably the secretive bitcoin creator. Their investigations were based on leaked emails, documents and web archives, including what was said to be a transcript of a meeting between Wright and Australian tax officials.

The identity of Satoshi Nakamoto has long been a mystery journalists and bitcoin enthusiasts have tried to unravel. He, she or a group of people is the author of the paper, protocol and software that gave rise to the cryptocurrency. The New York Times, Newsweek and other publications have guessed at Nakamoto’s real identity, but none has proved conclusive. Uncovering the identity would be significant, not just to solving a long-standing riddle, but for the future of the currency. And as an early miner of bitcoins, Nakamoto is also sitting on about 1 million bitcoins, worth more than $400 million at present exchange rates, according to bitcoin expert Sergio Demian Lerner.

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Governments should not be allowed to blow these bubbles for short-term popularity. They’re far too disruptive for societies.

Australian Housing Boom Leaves Swath of Empty Properties (BBG)

Australia’s three-year property boom is leaving Melbourne awash with empty homes. In the country’s second-biggest city, growing numbers of local landlords and absent overseas owners have locked up their properties — forgoing rental income as they focus instead on price gains, a report by Prosper Australia said Wednesday. Some 82,724 properties, or 4.8% of the city’s total housing stock, appear to be unused, said the report, which estimated occupancy rates by gauging water usage. In the worst-hit areas, a quarter of all homes are empty, said Prosper. The research group is lobbying for more affordable housing through tax reform. Driven by a wave of Chinese buyers and record-low interest rates, average home prices have soared to about A$700,000 ($505,000) in Melbourne and around A$1 million in Sydney.

But with prices now cooling, the empty accommodation also masks a hidden glut of supply that could worsen any housing slump. “Those properties need to be utilized,” said Catherine Cashmore, author of the Prosper report, Speculative Vacancies. “Having property sitting vacant has a very high cost on the economy. It’s very destructive to our national prosperity.” The study, now in its eighth year, assessed 1.7 million residential properties in and around Melbourne during 2014. Those using less than 50 liters of water a day – the rough equivalent of one shower and a flush of a toilet – were deemed vacant. Sydney, where high-rise blocks have sprouted in the inner suburbs, is also likely to have a vacancy problem, said Cashmore. Data on water usage at individual apartments isn’t as comprehensive in Sydney as in Melbourne, she said.

Surging home prices triggered a boom in high-rise construction in Melbourne’s inner-city suburbs, squashing rental yields and leaving landlords with little incentive to find a tenant, said Cashmore. Analysts at Credit Suisse estimated this year that Chinese buyers were on course to take out 20% of new homes across Australia in 2020, up from the current 15%. While the Prosper report doesn’t identify overseas-owned properties, it said a “significant proportion” of foreign-owned real estate is empty, inflating prices. “There is a wall of money that is trying to get into Australia,” Cashmore said. “To fight those forces is going to be very difficult.”

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But what if next year millions more arrive?

Germany Takes In More Refugees In 2015 Than US Has In Past 10 Years (Quartz)

Germany is on pace to take in one million asylum-seekers this year. In the last 11 months, the country has taken in 964,574 new migrants, including more than 200,000 just in November. According to Die Welt, more than half of the potential refugees—about 484,000 migrants—came from Syria. Germany has accepted the largest number of asylum-seekers of all European countries, according to the UN High Commissioner for Refugees. “Germany is doing what is morally and legally obliged,” chancellor Angela Merkel said in September. “Not more, and not less.” It’s extraordinary also because it’s larger than the total number of refugees that the US—with a population of 320 million to Germany’s 80 million—has accepted in the last 10 years.

Since 2005, the US has accepted a total of 675,982 refugees from regions all over the world, according to data from the Refugee Processing Center, an arm of the US Department of Justice’s Bureau of Population, Refugees and Migration. President Barack Obama in September announced a plan for the US to resettle 10,000 Syrian refugees over the next year, and has recently called on Americans to welcome Syrian families as modern-day pilgrims. But his campaign to show the US can shoulder more of the weight of Europe’s migrant crisis has faced its own challenges: Obama’s refugees plan has drawn criticism from several, mostly Republican state governors who cite security concerns for US citizens after the Nov. 13 terror attacks in Paris. Just last week, Texas filed a lawsuit against the federal government for moving forward with plans to resettle two Syrian families in the state—although in recent years, the state has taken in more refugees than any other in the US.

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Think this is what you call opportunism.

How Germany’s Right-Wing Tabloid Bild Learned to Love Refugees (BBG)

Bild’s 2015 embrace of refugees was as though Fox News had suddenly endorsed President Obama on climate change. Throughout September, Bild stayed upbeat, dramatizing the journeys of Syrians across the continent, rallying behind Merkel, and shaming European leaders such as David Cameron and Viktor Orbán, who closed their borders. If there were a common thread in Bild’s anti-Greece coverage and its pro-refugee coverage, it was a chest-beating confidence in Germany’s superiority to its European neighbors. Bild was one of the first German newspapers to print a photo of Alan Kurdi, the Syrian boy who drowned on Sept. 2; when some readers criticized the choice, Bild stood its ground, running a subsequent issue without any photos whatsoever.

At the same time, Bild developed “Wir Helfen” into a national campaign. It publicized the volunteer efforts of its readers; teamed with German soccer clubs to promote aid for refugees; and published in Arabic a free welcome guide for refugees in Berlin. “In the past, it was not so often that Germany gave a great example to the world,” Diekmann said. “This is a historic situation, and if we don’t take up this challenge, who else will be able to do so?” Few media critics have accepted Bild’s change of heart at face value. “They are really eager to be positive,” said Mats Schönauer, editor of BildBlog, Germany’s main media criticism outlet, which started in 2004 as a site devoted solely to pointing out Bild’s errors. “The question is first, how long does it last? And second, how honest is it?”

To Schönauer, Bild’s refugee coverage reeks of hypocrisy. “For years, they created this fire, and now they’re playing the role of fireman,” he said. Others attribute the coverage to opportunism. “Bild will never put itself against the mood on the ground of the population,” said Wolfgang Storz, former editor of the Frankfurter Rundschau. “If the mood in Germany swings against refugees, then Bild will undoubtedly campaign against refugees.” Diekmann does not dispute that Bild has largely tracked public opinion rather than shaped it. “No medium is strong enough to create a culture that is not actually there,” he said. “From the beginning, it was clear that this atmosphere would not be there all the time.” In early October, as public support for Merkel dipped, Bild’s tone began to waver.

On Oct. 8, Bild published a poll asking readers whether they supported Merkel or Horst Seehofer, the Bavarian politician who has emerged as the biggest critic of her refugee policy. Ninety% of Bild readers supported Seehofer. A few days later, the tabloid ran a story about a meeting in Sumte, a town of 100 people that was due to house 1,000 refugees in an empty office complex. It quoted one citizen who worried that refugees would rape women on Sumte’s poorly lit streets. “The question that lurks behind every question that is asked this evening: Is one allowed to say that one has fears about the large number of refugees? Or does that make one a Nazi?” the paper asked.

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Just another day at the office…

6 Afghan Migrant Children Drown Off Turkish Coast On Way To Greece (AP)

Turkey’s state-run news agency says six children have drowned after a rubber dinghy carrying Afghan migrants to Greece sank off Turkey’s Aegean coast. The Anadolu Agency said the coast guard rescued five migrants from the sea on Tuesday and were still looking for two others reported missing. The bodies of the children were recovered. Anadolu didn’t report their ages, but said one of them was a baby. The migrants were apparently hoping to make it to the island of Chios from the resort of Cesme despite bad weather. Turkey has stepped up efforts to stop migrants from leaving to Greece by sea. Last week, authorities rounded up around 3,000 migrants in the town of Ayvacik, north of Cesme, who were believed to be waiting to make the journey to the Greek island of Lesbos.

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For letting this happen, Brussels should be dismantled as soon as possible. This is a scar on all Europeans, for the rest of their lives.

11 Refugees, Including 5 Children, Drown Near Greek Island, 13 Missing (GR)

Eleven dead, including five children, is the latest toll in the ongoing inflow of refugees on Greek islands near the Turkish coasts. A Frontex boat received a call on Tuesday night about dozens of people in the water northeast of Farmakonisi island. A coast guard rescue boat and a Greek Navy gunboat rushed on the spot and rescued 26 people (17 men, 5 women and 4 children). The rescue team pulled out of the water five children, four men and two women dead, while the survivors said that there are 13 people missing. They said there were 50 passengers on the wooden boat that capsized, despite the fact that the weather conditions were good. A rescue mission is taking place in the area to locate the missing persons.

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Dec 082015
 
 December 8, 2015  Posted by at 10:42 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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NPC Tank truck with plow clearing snow, Washington, DC 1922

Commodities Rout Deepens As Chinese Trade Data Signal Weaker Demand (Guardian)
China November Exports Down -6.8%, Imports -8.7% (Reuters)
Anglo American Scraps Dividend As Shares Fall 71% So Far This Year (BBG)
OPEC Forces Re-Rating Of Oil Majors (BBG)
Peter Schiff: ‘The Whole Economy Has Imploded; Collapse Is Coming’ (SHTF)
We Are Shrinking! The Neglected Drop In Gross Planet Product (VoxEU)
Beijing Issues First-Ever Red Alert for Hazardous Smog (WSJ)
Euro Regime Is Working Like A Charm For France’s Marine Le Pen (AEP)
EU Is In Danger And Can Be Reversed: European Parliament’s Schulz (Reuters)
Tsipras Says IMF Behavior In Greek Crisis Not Constructive (Reuters)
Greece’s Five Ticking Time Bombs (BBG)
New Zealand Named The World’s Most Ignorant Developed Country (NZH)
Albuquerque Revises Approach Toward Homeless, Offers Them Jobs (NY Times)
Swedish Legal Watchdog Rejects Proposal For Border Controls (Reuters)
Escapism Magazine Devotes Whole Issue To Reality Of Refugee Crisis (Guardian)

Huh? “Analysts were unsure if the numbers signalled a possible improvement in Chinese domestic demand..”

Commodities Rout Deepens As Chinese Trade Data Signal Weaker Demand (Guardian)

The accelerating rout in commodity prices has piled pressure on energy and resources shares in Asia Pacific amid more signs of slowing demand from China. Although oil prices pushed back on Tuesday from seven-year lows, stock markets around the region felt the pain from uncertainty about global growth and the likely rise in US interest rates later this month. The Nikkei index in Japan was down almost 1% on Tuesday and the Shanghai Composite and Hang Seng indices were down more 0.9% and 1.6% respectively. In resource-rich Australia, the ASX/S&P200 benchmark had a volaltile day but bears had the upper hand by the afternoon with the index off 0.91% at the close with the big oil and gas and mining companies bearing the brunt.

“Beyond the December hike, investors are concerned about the lack of Chinese demand which is acting as a millstone around the neck of risky assets and most investors will stay away until they see a clearer direction on rates,” said Cliff Tan, east Asian head of global markets at Bank of Tokyo-Mitsubishi UFJ in Hong Kong. Data showed on Tuesday that China’s exports fell by a more-than-expected 6.8% in November from a year earlier, their fifth straight month of decline. Imports fell 8.7%, which was not as much as expected but enough to signal continued weak demand from the world’s second biggest economy.

Analysts were unsure if the numbers signalled a possible improvement in Chinese domestic demand, which has been a key factor in driving world commodity prices to multi-year lows. “The big picture hasn’t really changed that much. The US is doing okay, but the problems with emerging markets are really quite big,” said Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital Markets in Hong Kong. “Imports have been slumping for more than a year now, so the year-on-year figures are benefiting from a much lower base, which statistically we should expect. But I’m not so sure the number today reflects a real fundamental change for the better in import demand.”

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“While some market watchers have pointed the blame squarely on China for this year’s global trade slowdown, the latest data highlighted weak demand globally..”

China November Exports Down -6.8%, Imports -8.7% (Reuters)

China’s trade performance remained weak in November, casting doubt on hopes that the world’s second-largest economy would level off in the fourth quarter and spelling more pain for its major trading partners. The sluggish readings will reinforce expectations of economists and investors that the government will have to do more to stimulate domestic consumption in coming months given persistent weakness in global demand. Exports fell a worse-than-expected 6.8% from a year earlier, their fifth straight month of decline, while imports tumbled 8.7%, their 13th drop in a row. Imports did not slide as much as some economists had feared, but analysts were unsure if that signaled a possible improvement in soft Chinese domestic demand, which has been a key factor in driving world commodity prices to multi-year lows.

“The big picture hasn’t really changed that much. The U.S. is doing okay, but the problems with emerging markets are really quite big,” said Kevin Lai, chief economist Asia Ex-Japan at Daiwa Capital Markets in Hong Kong. “Imports have been slumping for more than a year now, so the year-on-year figures are benefiting from a much lower base, which statistically we should expect. But I’m not so sure the number today reflects a real fundamental change for the better in import demand.” To be sure, China imported more copper, iron ore, crude oil, coal and soybeans in November by volume than in the preceding month, preliminary data from the General Administration of Customs showed on Tuesday. But analysts said opportunistic Chinese buyers may have merely been taking advantage of a fresh slump in commodity prices, and will likely continue to export large quantities of finished products such as steel and diesel fuel because demand is not strong enough at home.

By value, China’s imports from the United States, the European Union and Japan all dropped, and in the case of Australia by a double-digit rate. While some market watchers have pointed the blame squarely on China for this year’s global trade slowdown, the latest data highlighted weak demand globally, with China’s shipments to every major destination, except South Korea, declining year-on-year. “China’s trade performance remains weak, as the trade value is likely to drop 8% for the whole year of 2015, versus an increase of 3.7% in 2014, clearly reflecting a de-leveraging process in the manufacturing sector that has dragged down demand for commodities,” Zhou Hao at Commerzbank in Singapore said.

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Miners hurt.

Anglo American Scraps Dividend As Shares Fall 71% So Far This Year (BBG)

Anglo American scrapped its dividend for the first time since 2009, announced further spending reductions and plans to consolidate its business units to three from six as it accelerated a fight against a collapse in commodities. The company will suspend its payouts for the second half of 2015 and for 2016, it said in a statement Tuesday. Anglo is abandoning its practice of steadily increasing the dividend in favor of a system that allows the payment to rise and fall with the company’s profits, known as a dividend payout ratio. The producer reduced spending forecasts for 2015 to 2017 by $2.9 billion and increased the amount it plans to raise from asset sales to $4 billion from $3 billion, with its phosphates and niobium businesses confirmed for disposal, it said.

Anglo expects impairments of $3.7 billion to $4.7 billion because of weak prices and asset closures. “We will be consolidating our six business unit structures into three –De Beers, industrial metals and bulk commodities – providing further opportunity to reduce the cost burden on our business,” CEO Mark Cutifani said in the statement. Cutifani is seeking to turn around the company’s fortunes in the face of metal prices at the lowest in at least six years. It has sold assets and cut jobs to preserve cash as the shares tumbled 70% this year, the second-biggest decline in the U.K.’s FTSE 100 Index. The last time Anglo cut its dividend, during the depths of the global financial crisis in 2009, the shares plunged 17% in one day.

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Downgrades for all.

OPEC Forces Re-Rating Of Oil Majors (BBG)

For months, many executives at the world’s largest oil producers have been talking about prices staying lower for longer. After OPEC’s decision to keep pumping full pelt that could become lower for even longer. Even before Friday, the prolonged slump in crude had forced analysts to cut their earnings-per-share estimates for the world’s 10 largest integrated oil companies in recent weeks. With oil dropping to the lowest in more than six years after the OPEC meeting on Friday, further downgrades are probably on the way. “A potential OPEC cut was the last source of hope for the bulls near term,” Aneek Haq with Exane BNP Paribas said Dec. 4.

“The oil majors have already started to underperform the market over the past few weeks, but this now coupled with earnings downgrades and valuations that imply $70 a barrel should put further pressure on share prices.” Mean adjusted 2016 EPS estimates for Exxon Mobil and Shell have been cut by more than 8 cents over the past month, according to data compiled by Bloomberg. EPS projections for Total, Europe’s second-biggest oil company, and Repsol are lower for 2016 than those for this year. Those estimates assume a much higher price than the $41.06 a barrel that Brent traded at as of 8:19 a.m. in London on Tuesday. Oswald Clint at Sanford C. Bernstein has based his EPS estimates for oil majors at a Brent price of $60 a barrel. Alexandre Andlauer at AlphaValue SAS has assumed a price of $63.

“The re-rating of the oil companies downwards will accelerate now,” Andlauer said Dec. 7 by phone from Paris. “Valuations will have to drop.” Shell’s B shares, the most actively traded, dropped 4.6% on Monday, the most in more than three months. BP dropped 3.4%, while the benchmark FTSE 100 Index declined 0.2%. “The lower-for-longer scenario that oil companies are predicting is going to become lower-for-even-longer,” said Philipp Chladek, a London-based oil sector analyst with Bloomberg Intelligence. “We will see some revisions in EPS forecasts in the near future because most forecasts are assuming an oil price recovery during 2016. Many will be taking that out now.”

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“..we have to come to terms with paying the bill..”

Peter Schiff: ‘The Whole Economy Has Imploded; Collapse Is Coming’ (SHTF)

Peter Schiff continues to argue that the economy is on a downhill trajectory and this time there’ll be no stopping it. All of the emergency measures implemented by the government following the Crash of 2008 were merely temporary stop-gaps. The light at the end of the tunnel being touted by officials as recovery, Schiff has famously said, is actually an oncoming train. And if the forecast he laid out in his latest interview is as accurate as those he shared in 2007, then the the train is about to derail.

We’re broke. We’re basically living off of debt. We’ve had a huge transformation of the American economy. Look at all the Americans now on food stamps, on disability, on unemployment. The whole economy has imploded… the bottom hasn’t dropped out yet because we’re able to go deeper into debt. But the collapse is coming.

Fundamentally, America is worse off now than it was pre-crash. With the national debt rising unabated and money being printed out of thin air without reprieve, it is only a matter of time. Schiff notes that while government statistics claim Americans are saving again and consumers seem to be spending, the average Joe Sixpack actually has a negative net worth. But most people don’t even realize what’s happening:

I read a statistic… The average American has less than a $5000 net worth… it’s pathetic… we’re basically broke… but in fact it’s much less… If you actually took the national debt and broke it down per capita, the average American has a negative net worth because the government has borrowed in his name more than the average American is able to save.

What’s happening is pretty much what we would anticipate. I don’t see from the data any real economic recovery, certainly not in the United States. We’re spending more money, but it’s not because we’re generating more wealth. We’re generating more debt. We’re using that borrowed money to consume and so temporarily it feels that we’re wealthier because we get to spend all that money… but we have to come to terms with paying the bill. The bills are going to come due. Right now interest rates are being kept at zero which makes it possible to service the debt even though it’s impossible to repay it… at least we can service it. But once interest rates go up then we can’t even service it let alone repay it. And then the party is going to come to an end.

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Its own data makes the IMF’s words look silly.

We Are Shrinking! The Neglected Drop In Gross Planet Product (VoxEU)

The analysis and forecasts of the IMF are well covered in the press. This column deals with a less noted development in the data provided by the IMF, namely the nominal decrease in Gross Planet Product. Since the IMF forecast both positive growth and positive inflation, the nominal shrinkage of GPP puts into question the consistency of the IMF World Economic Outlook data and forecasts. Presenting the October 2015 IMF World Economic Outlook, Maurice Obstfeld (2015) identified the fall of commodity prices as one of the powerful forces shaping the outlook for the world economy.

The strength of this force, however, is underestimated by the official forecasts in the IMF’s flagship publication. As illustrated in Figure 1 the IMF world economic outlook database reports a reduction of Gross Planet Product (GPP) for the year 2015 by -$3,8 trillion (-4.9%). A nominal reduction of GPP of this size has occurred only once since 1980 (the starting year of the IMF database), namely at the start of the Great Recession when GPP contracted by -5.3%. Table 1 illustrates that all previous contractions of nominal GPP are associated with major crises in the world economy.

Figure 1. Gross Planet Product at current prices (trillions of dollars, 1980 – 2015)

Source: IMF World Economic Outlook Database, October 2015.

Table 1. Years with nominal contractions of GPP (1980-2015)

Source: IMF World Economic Outlook Database, October 2015.

The reduction at current prices is especially noteworthy in view of the official IMF forecasts that set real economic growth at 3.1% and planetary inflation at 3.3%. Taken at face value these forecasts imply a growth rate of GPP of + 6.5 %. By implication the IMF is either too optimistic about real growth, too optimistic about the avoidance of deflation or too optimistic about both these factors.

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Close factories?!

Beijing Issues First-Ever Red Alert for Hazardous Smog (WSJ)

Beijing’s residents have long wondered: Just how bad do the capital’s skies have to get before the government issues an emergency red alert? The serially ‘airpocalypse’-stricken city has in the past resisted issuing such an alert, which requires that authorities implement a series of smog-combating measures. Among other steps, under a red alert half of the city’s cars are ordered off the streets, the government recommends that schools be shuttered and outdoor construction must come to a halt. Such alerts are — in theory at least — to be issued when authorities forecast an air-quality index of above 300 for at least three consecutive days. China’s air-quality index has a maximum reading of 500, or what the government calls “severely polluted.”

On Monday, Beijing issued a red alert for the first time. The alert goes into effect Tuesday morning, with its environmental protection bureau saying that bad air was expected to last until Thursday, Dec. 10. According to an analysis released earlier this year, air pollution could prematurely kill more than 250,000 Chinese residents in major cities. Greenpeace campaigner Dong Liansai said that greater scrutiny from authorities, as well as public pressure, had likely helped spur Monday’s decision. “The cost of issuing a red alert is really high for the city, so officials weren’t willing to do it so easily,” Mr. Dong said. “But everyone has been talking about the issue lately and wondering why Beijing hasn’t issued it before, even during the really bad spells of smog.”

Last week, high concentrations of smog in Beijing at times made it seem like an eerie, artificial dusk had descended on the nation’s capital, with pollution across the city breaching the government’s official air quality index. Photos of the unnatural pall that swallowed up buildings across town went viral on social media, with even normally more restrained state media outlets such as national broadcaster China Central Television giving wide coverage to the spectacle.

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“The Socialist Party was reduced to 15pc of what was once its core constituency, and can no longer make any plausible claim to be the voice of the French working class.”

Euro Regime Is Working Like A Charm For France’s Marine Le Pen (AEP)

France is trapped in an economic slump that is hauntingly reminiscent of the inter-war years from 1929 to 1936 under the Gold Standard. Each tentative rebound proves to be a false dawn. The unemployment rate has continued to climb since the Lehman crisis, in stark contrast to Germany, Britain and the US. It jumped by 42,000 in October to an 18-year high of 10.6pc. The delayed political fuse has finally detonated. Marine Le Pen’s Front National – these days a blend of nationalist-Right and welfare-Left – swept half the communes of France in the first round of regional elections over the weekend. The Front won 55pc of voters classified as workers (ouvriers). The Socialist Party was reduced to 15pc of what was once its core constituency, and can no longer make any plausible claim to be the voice of the French working class.

“Nothing has been done about unemployment despite all the promises. Nobody has been listening to the distress,” said Professor Brigitte Granville, from Queen Mary University of London. Mrs Le Pen has filled the vacuum. She has abandoned the free-market views of her father, party founder Jean-Marie Le Pen, who once espoused “Reaganomics” and vowed to shrink the state. She is eating into the Socialist base from the Left, vowing to defend the French welfare model against the “neo-liberals” and to defeat the “dictatorship of the markets”. She calls globalisation the “law of the jungle” that allows multinationals to play off cheap labour in China against French labour Her plans include a national industrial strategy that swats aside EU competition law, as well as a cut in the retirement age to 60, and a “realignment of taxation against capital and in favour of workers”.

Pierre Gattaz, head of the employers federation MEDEF, calls it a radical agenda stolen from the Left that would destroy France. Yet it clearly makes a heady brew for voters when mixed with nationalist identity politics. Mrs Le Pen once told The Telegraph that her first act in the Elysee Palace would be to order the treasury to draw up plans for a restoration of the French franc. “The euro ceases to exist the moment that France leaves. What are they going to do about it, send in tanks?” she said. Professor Jacques Sapir, from l’École des hautes études (EHESS) in Paris, says the Front National made its biggest strides in regions that have suffered the full force of de-industrialisation and the “globalisation shock”. Many of these areas are in the centre of the country, or in Burgundy and Lorraine, or parts of Normandy and Picardy, that are not key battlegrounds of France’s immigration and culture wars.

Prof Sapir said French industry is slowly being hollowed out. It is a drip-drip effect of closures – typically hitting 150 or 200 workers at a time – that slips below the radar screen of the national press. “These are the regions of rural misery,” he said. Prof Granville said there is no doubt that France’s problems are home-grown. It is entangled in a thicket of unworkable laws. There are 383 taxes, of which 50 cost more to enforce than they yield. The labour code is more than 3,000 pages, acting as a gale-force headwind against job creation. Yet monetary union has played its part, too. The eurozone’s twin policies of fiscal and monetary contraction from 2011 to 2014 aborted the recovery and led to a deep recession that went on long enough to cause lasting economic damage through labour “hysteresis”.

Prof Granville said there is another twist. France and Germany moved in radically different directions after the launch of the euro. While Paris introduced the 35-hour working week, Berlin pushed through the Hartz IV wage squeeze and an internal devaluation within EMU – a beggar-thy-neighbour strategy. The result is that France has lost 20pc in labour cost competitiveness. It had a current account surplus of 2.5pc of GDP at the start of the last decade. It is now bleeding national wealth slowly – as is Britain, for different reasons – with a cyclically-adjusted deficit of 1.5pc. She compared it to the slow torture France endured in the early 1930s under the Gold Standard, stoically accepting the “500 deflation decrees” of premier Pierre Laval. The dam broke in 1936 with the election of spurned outsiders, then the Front Populaire.

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Reality bites.

EU Is In Danger And Can Be Reversed: European Parliament’s Schulz (Reuters)

The European Union is at risk of falling apart and supporters must fight to keep it, the head of the European Parliament said in a German newspaper interview. Martin Schulz told Die Welt’s Tuesday edition that the EU was in danger and that there were forces trying to pull it apart. He was responding to a recent warning from Jean Asselborn, Luxembourg’s foreign affairs and migration minister, that the EU might break apart, “No one can say whether the EU will still exist in this form in 10 years’ time. If we want that then we need to fight very hard for it,” Schulz said. He was not specific about what was threatening the EU, but much of the interview was focused on the migrant crisis, which has stretched Europe’s unity and tolerance during the year.

Schulz said that the EU was not without alternatives and “could of course be reversed”, adding that other options including a Europe in which nationalism, borders and walls were prevalent. “That would be disastrous because that kind of Europe has repeatedly led our continent into catastrophe,” he added. Divisions in the EU over the migrant crisis are rife, notably between German Chancellor Angela Merkel, who has led efforts to take in more Syrians, and leaders in the formerly Communist East who oppose EU schemes to make them take in some asylum seekers. And Europe’s passport-free Schengen zone looks under threat too, with some countries re-introducing border controls.

Last Thursday Greece asked for European help to secure its borders and care for crowds of migrants, defusing threats from EU allies to bar it from Schengen if it failed to get control. Schulz said no country could single-handedly tackle challenges like migration, adding that this was only possible together as the EU.

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And now debt relief is no longer important?!

Tsipras Says IMF Behavior In Greek Crisis Not Constructive (Reuters)

Greek Prime Minister Alexis Tsipras said on Monday the IMF was not playing a constructive role in Greece’s bailout and should make up its mind whether it wants to stay in the program. He accused the Washington-based global lender of making unrealistic demands both on Greece for tough reforms and on its euro zone partners for debt relief beyond what they can accept. “This is a stance that cannot be called constructive in this process,” the leftist leader said in a television interview. “The Fund must decide if it wants to compromise, if it will stay in the program,” Tsipras said. “If it does not want that compromise, it should say so publicly.” The IMF has taken the hardest line in demanding pension reform with benefit cuts, and a far-reaching liberalization of Greece’s labor market.

It has also said European governments need to grant Athens debt relief on a scale they have so far been unwilling to consider – including a possible 30-year debt service holiday – to make the public debt mountain sustainable. The IMF has not disbursed any aid to Greece since August 2014 under a previous program due to expire next March. Athens defaulted on an IMF loan repayment in June but has since made up the arrears after receiving a third bailout from euro zone creditors. An IMF spokesman said last week the Fund would decide whether to co-finance the new bailout after the first review of compliance with the program, expected early next year, and in light of how much debt relief Greece receives.

Tsipras acknowledged that it was important for creditor countries such as Germany and Finland for the IMF to stay in the program to ensure discipline. But he said Europe had the expertise to manage such programs on its own. The Fund was not being helpful by making reform demands that Greece’s political system and society could not bear, “and by going to the (EU) partners demanding solutions and proposals on debt sustainability which they know our partners cannot accept”.

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“Rather than pushing to write off some of the face value of the debt – a “haircut,” in bond market jargon – Greece’s government is likely to accept delayed repayment of principal..”

Greece’s Five Ticking Time Bombs (BBG)

Remember the Greek crisis? Last time we checked in, a newly mandated Greek government reached an agreement with creditors and the country was on its way to recovery, or at least stability. Well, not exactly. Several days in Athens spent talking with investors, business leaders and government officials last week made it clear to me that the chances of a fatal misstep remain high. While Prime Minister Alexis Tsipras got approval for his 2016 budget – narrowly, after 153 lawmakers backed the budget, with 145 parliamentarians voting against and two abstentions – the challenges ahead make his previous Houdini acts (especially ignoring the result of his own referendum) look easy. The budget calls for selling state-owned assets, reforming public-sector wages, dealing with bad loans at the nation’s banks and fixing a broken pensions system. Any one of these could prove unpalatable to the Greek parliament and trigger a renewed crisis. Trying to pin officials down on precise dates for implementing these reforms is an exercise in futility. So here are five ticking time bombs that lie ahead for Greece in the coming weeks.

1 ) NON-PERFORMING LOANS – The percentage of Greek loans that aren’t being repaid, including mortgages, consumer debt and company loans, is more than 48%, according to an October report by the European Central Bank. No wonder Greek bank stocks have lost 95% of their value this year.

2) PENSION REFORM – Everyone agrees that with Greek unemployment averaging more than 25% this year, the current pensions system is unsustainable. There aren’t enough people paying in, and a jobless rate that’s been above 20% for more than four years risks creating an underclass of people who’ve never contributed and will never qualify. Many households are currently dependent on the pension income of a single family member to stay financially afloat.

3) PRIVATIZATIONS – In July, the government promised a “significantly scaled-up privatization program” to generate 50 billion euros ($54 billion) of proceeds. Thus far, there’s little evidence of progress, although officials insist that agreements on selling ports and local airports are on the verge of completion.

4) CAPITAL CONTROLS AND THE BANKS – An American I met in Athens last week was joking about how many Greek bank shares he could buy for the price of a New York subway ticket. But if you’re a Greek taxpayer, it’s not funny; the money the government put into the banks has effectively disappeared. Shares of Piraeus Bank, for example, trade at 65 euro cents; a year ago, they were worth 134 euros apiece. Its market capitalization is 39 million euros, down from more than 8 billion euros.

5) DEBT RELIEF – The good news is that Greek officials are being pragmatic about what’s achievable on the debt-relief front. The not-so-good news is they’ll still want to come back from Brussels with something they can sell to their voters. Rather than pushing to write off some of the face value of the debt – a “haircut,” in bond market jargon – Greece’s government is likely to accept delayed repayment of principal, although it also wants even lower interest rates.

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Too much time on their hands.

New Zealand Named The World’s Most Ignorant Developed Country (NZH)

A new report shows New Zealanders have the wrong idea about the world around them. The Perils of Perception survey shows New Zealand is the most ignorant developed country, with most people misunderstanding the facts that make up our country’s society. The Ipsos-MORI poll showed inequality was one area where New Zealanders got it wrong. Kiwis hugely overestimated the proportion of wealth owned by the wealthiest 1% in the country. The average response on the percentage of wealth controlled by the wealthiest 1% in New Zealand was 50%. In reality, the wealthiest New Zealanders hold 18% of the country’s wealth. Most of the other countries believed the wealthiest 1% should own a smaller proportion of the country’s wealth than they currently do, but New Zealand responded the opposite.

In contrast, when asked what percentage of wealth the wealthiest New Zealanders should hold, Kiwis answered 27%, which is nearly 10 percentage points more than what they control currently. New Zealanders underestimated the rate of obesity or overweight people in the country, guessing 47% of the population was obese or overweight, when in fact 66% fall into those categories. Religion was another area where New Zealanders were off the mark. Asked how many people in 100 they believed did not affiliate with any religion, New Zealanders responded 49 people. In fact, 37 out of 100 people do not affiliate with any religion. New Zealanders overestimated the number of migrants living in the country, saying they believed 37% of the population are migrants. This was the third highest percentage answered to the question by any country. The correct answer was 25%.

The most ignorant country was Mexico, followed by India and Brazil taking second and third place respectively. New Zealand was the most ignorant developed country in fifth place overall.

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Sanity. The dignity of work. What should be obvious and normal has become left field. But we can still do it. Do the obvious. Give people pay for doing what they can see has an effect in their community. It’s not that hard.

Albuquerque Revises Approach Toward Homeless, Offers Them Jobs (NY Times)

Will Cole steered an old Dodge van along a highway access road one recent Tuesday, searching for panhandlers willing to work. Four men waved him away dismissively at his first attempt, turning their backs on the van as it rolled past. By the third stop, though, nine men and one woman had hopped inside. They were homeless. But suddenly, as part of a novel attempt to deal with rising poverty and destitution here, they were city workers for the day. Donning gloves and fluorescent vests, they raked a piece of messy ground by some railroad tracks on the edge of downtown, cleaning up residues of lives that may well have been their own: a soiled burgundy blanket, two Bibles soaked by melting snow, a trail of crushed cans of Hurricane High Gravity Malt Liquor.

For participants, the toil paid off decently: $9 an hour and a lunch of sandwiches, chips and granola bars, enjoyed in a park. For the city, it represented a policy shift toward compassion and utility. “It’s about the dignity of work, which is kind of a hard thing to put a metric on, or a matrix,” Mayor Richard J. Berry said. “If we can get your confidence up a little, get a few dollars in your pocket, get you stabilized to the point where you want to reach out for services, whether the mental health services or substance abuse services — that’s the upward spiral that I’m looking for.”

After a schizophrenic homeless man, James Boyd, was fatally shot by the police last year — prompting protests and calls for reform of the Albuquerque Police Department, a force of 1,000 whose rate of deadly shootings was eight times that of New York’s — this city has sought to recalibrate its approach toward homelessness. While other cities, including New York, Baltimore, Los Angeles and Washington, have tried to clear out homeless camps or move the homeless further into the shadows, this city has decided to move away from the punitive approach that had defined strategies in the past.

It is, in part, the result of an agreement with the Justice Department, which released a blistering review of the use of force by police officers over the years, citing a pattern of violence and mistreatment that disproportionately affected mentally ill people, including many who were living on the streets. For example, training in crisis intervention has become a requirement for police cadets, who must try to find their way out of staged real-life scenarios — encounters with distressed drug addicts, rape victims or suicidal war veterans — without pulling out their guns.

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“The proposal has been prepared in great haste,” the Council wrote, adding that meant the draft text had been poorly prepared. “This is particularly serious because the proposal is similar to martial law.”

Swedish Legal Watchdog Rejects Proposal For Border Controls (Reuters)

The top legal watchdog in Sweden, a major destination for migrants flocking to Europe this year, on Monday rejected a government request for the right to impose tighter border controls and shut a bridge to Denmark. The Swedish Council on Legislation said the centre-left government’s plan resembled martial law and would violate refugees’ right to seek asylum in Sweden. Stockholm imposed temporary border controls in early November, the first in over two decades and a turn-around in its open-doors policy. The country has welcomed almost 160,000 refugees and migrants this year, more per capita than any other European Union country. Its latest step would fast-track a bill giving it the legal right to tighten the border controls and to close down the bridge between Sweden and Denmark if deemed necessary.

“The proposal has been prepared in great haste,” the Council wrote, adding that meant the draft text had been poorly prepared. “This is particularly serious because the proposal is similar to martial law.” The council has no legal mandate to disqualify proposed legislation but it is unusual for Swedish lawmakers to disregard its opinion. However, in a comment to local news agency TT, a government spokesman said it had no plans to withdraw the proposal. “The Council on Legislation makes a different assessment than the government regarding seriousness of the current refugee situation,” said Erik Brom Anderson, State Secretary to Infrastructure Minister Anna Johansson. “The government’s assessment has not changed.”

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Good move.

Escapism Magazine Devotes Whole Issue To Reality Of Refugee Crisis (Guardian)

Escapism magazine, which is distributed to commuters in central London, usually tells readers where they can enjoy exotic holiday destinations, the world’s best beaches and the coolest hotels. But the latest issue of the travel magazine is very different indeed. All 84 pages are dedicated to explaining the refugee crisis. And, in what must rank as a first for a giveaway title, it is entirely free from adverts. It highlights the various refugee crises across the world through a series of graphics, carries features written by refugees about their experiences, and there is a moving report from the Greek island of Lesbos where so many of the refugees from Syria and Afghanistan are currently living in camps.

Escapism’s associate editor, Hannah Summers, says: “For our readers, escapism has been a way to get away with family and friends, to relax on holiday. But, for many, it takes on a much more literal meaning – an escape from poverty and war.” In the magazine, Summers writes: “When I became a travel writer I never expected to cover an issue like this, but I’m grateful for an opportunity that has opened my eyes to an unjust and painful reality that’s also full of courage, humanity and, ultimately, hope. “This crisis affects us all, and we all have a part to play in how it unfolds. There are many ways you can get involved, but the most important thing is that you do get involved. Please, take action today.” A final page calls on readers to join “a kind and big-hearted group of volunteers” to help the refugees in the camp in Calais. For those who do not journey into the central zones of the London tube, much of the magazine’s content can be accessed on the magazine’s website.

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