Dec 082015
 
 December 8, 2015  Posted by at 10:42 am Finance Tagged with: , , , , , , , , ,  2 Responses »


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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Dec 042015
 
 December 4, 2015  Posted by at 9:50 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle December 4 2015


Danish frontpage today after No To More EU vote

Stocks Plunge With Dollar, Bonds as ECB Decisions Disappoint (BBG)
Mario Draghi Riles Germany With QE Overkill (AEP)
“But It’s Just A 0.25% Rate Hike, What’s The Big Deal?” (ZH)
Bankruptcy Might Be the Mining Industry’s Last Best Hope (BBG)
“Distress” in US Corporate Debt Spikes to 2009 Level (WolfStreet)
Hong Kong Housing Bubble Collapses, Sales Plunge 42% (ZH)
For China, The Real Battle For A Global Currency Is Just Beginning (BBG)
Top China Cop Targets Bankers After Putting Away Security Czar (BBG)
America’s Leadership Just Doesn’t Seem To Get It (Tanosborn)
It’s So Bad in Brazil That Olympians Will Have to Pay for Their Own AC (BBG)
Putin Wants Russia To Become World’s Biggest Exporter Of Non-GMO Food (RT)
Financial Engineering To Save The Planet (Kaminska)
Denmark Rejects Closer EU Ties as Skeptics Dominate Referendum (BBG)
Greece Asks EU For Help With Refugees Following Threats (Kath.)
World’s Woes Huddle on Greek Shores as Another Crisis Year Looms (BBG)

Did Draghi finally do something sensible? Very much depends on who you ask.

Stocks Plunge With Dollar, Bonds as ECB Decisions Disappoint (BBG)

Equities tumbled around the world and government bonds sank, while the euro rallied the most in six years after the scale of additional stimulus from the European Central Bank disappointed investors just as the Federal Reserve signaled interest-rate increases are imminent. The Standard & Poor’s 500 Index fell the most in two months and European equities had their worst day since the height of the summer selloff. The euro climbed against all its major peers, stinging traders who had piled on wagers against the currency amid expectations of aggressive easing from the ECB. Yields on 10-year German notes jumped 20 basis points, while rates on similar-maturity Treasuries posted their biggest advance since February. Brent crude rallied from a six-year low before Friday’s OPEC meeting.

The selloff in risk assets spread from Europe around the world, with investors anticipating deeper cuts to the region’s lending rates and an increase in the amount of ECB bond purchases to support flagging economic growth. Meanwhile, Fed Chair Janet Yellen indicated the conditions for higher rates in the U.S. had been met, boosting the odds the central bank will raise borrowing costs at its final meeting of 2015 on Dec. 16. “Everyone was positioned the same way going into today,” Michael Block, chief equity strategist at Rhino Trading Partners, said by phone. “Draghi disappointed, the long bond is down over three points, trades are getting messed up, it all snowballed and on days when that happens you have a problem. It’s the idea the central banks won’t be there to bail out equities.”

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Ambrose predicts nirvana for Europe next year. We do not.

Mario Draghi Riles Germany With QE Overkill (AEP)

The ECB has cut the deposit rate to a record low of -0.3pc and vowed to print money for as long as it takes to defeat deflation, pushing its radical stimulus measures to extremes never seen before in any major region in modern history. The far-reaching moves come despite signs that economic growth in the eurozone is picking up, and ignores vehement protests from German-led hawks that quantitative easing at this late stage is doing more harm than good. Mario Draghi said the bank will keep buying €60bn of bonds each month as far out as March 2017 or “beyond if necessary”. It is effectively an open-ended pledge. “Abundant liquidity will continue for a long, long time,” he said. Markets were betting on even more largesse, and reacted badly to the package of measures.

Many funds had expected an increase in the volume of QE purchases to nearer $80bn and an even deeper cut in the deposit rate, beguiled by the ultra-dovish rhetoric of top ECB officials over recent days. The euro soared by almost 4pc to $1.0933 against the dollar, smashing through technical stops in a bloodbath on the exchange markets. “It was the biggest one-day rise in the euro since 2009,” said Ian Stannard, from Morgan Stanley. Germany’s DAX index of equities and France’s CAC 40 both fell 3.6pc, the worst drop since August. The FTSE 100 dropped 2.3pc to 6,275. Yields on 10-year German Bunds spiked violently by 19 basis points to 0.66pc, with even more drastic reversals in Italy and Spain. An estimated €300bn of eurozone debt trading at negative rates has turned positive again within a single trading day, reducing the total to €2.2 trillion.

“Markets want immediate gratification. A lot of traders had large positions and they got caught out,” said David Owen, at Jefferies. “But when things settle down in a couple of weeks, people will realize that what happened today is highly significant. The ECB is adding another $360bn to its balance sheet and is now reinvesting its portfolio, like the Bank of England. This is a big deal,” he said. The ruckus on trading floors had echoes of August 2012, when Mr Draghi launched his back-stop plan for Italian and Spanish bonds (OMT), ending the eurozone debt crisis at a stroke. Markets sold off in a knee-jerk fashion at first but soon changed their mind as the significance sunk in. Mr Draghi said QE has been an unqualified success but the summer storm in emerging markets and China diluted the effects, while the commodity crash has made it even harder to fight deflation.

Inflation is still stuck at 0.1pc, leaving little safety margin against an external shock. “We are doing more because it works, not because it fails,” said Mr Draghi, insisting that the eurozone would have been in outright deflation this year without QE. Yet it is far from clear whether the region needs radical stimulus as far ahead as 2017, given that the ECB itself is predicting above trend growth of 1.7pc next year. Euroland is already benefitting from a near perfect storm of positive shocks. Fiscal austerity is finally over. The euro has fallen 13pc in trade-weighted terms since April 2014. Oil prices have plummeted from $114 a barrel to $43 in 18 months, giving consumers a shot in the arm.

[..]The Bundesbank warns that negative rates are causing serious problems for savings banks and smaller lenders, and make it much harder for insurance companies to match their maturities. Hans Werner Sinn, from the Germany’s IFO Institute, said Mr Draghi has given up trying to conduct a responsible monetary policy and is engaged in a covert rescue of ailing banks and governments. “The ECB has turned into a bail-out machine,” he said. Both German members of the ECB opposed the new measures, and were almost certainly joined by hawkish governors from the Netherlands and the Baltics. They may have stopped Mr Draghi going even further. “The ultra doves lost the argument,” said Frederik Ducrozet, from Pictet. [..] For Mr Draghi, it is a day he would probably rather forget. He delivered exactly what he promised yet for mysterious reasons the markets concluded otherwise. Sometimes you just can’t please them.

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$800 billion in reverse QE. Let’s see them do it.

“But It’s Just A 0.25% Rate Hike, What’s The Big Deal?” (ZH)

After today’s market plunge, the result of what even Goldman admitted may have been a major policy error by the ECB, suddenly the Fed’s determination to hike rates in two weeks lies reeling on the ropes. After all, what the ECB did was an implicit tightening of reverse QE1 proportions (it is no accident that the EURUSD is soaring as much as it did in March 2009 when the Fed unleashed QE). But assuming the Fed is still intent on hiking at all costs, and does just that in two weeks time, a question many are asking is where will General Collateral repo trade in case the Fed does decided to push rates higher by 0.25%: after all the Reverse Repo-IOER corridor is the most important component of the Fed’s rate hike strategy, one which better work or otherwise the Fed will be helpless to raise rates with some $3 trillion in excess liquidity sloshing around, and what little credibility it has will be gone for good. And much more importantly, what are the liquidity implications from such a move.

For the answer we go to the repo market expert, Wedbush’s E.D. Skyrm. Here are his thoughts: “Where will General Collateral trade when the fed funds target range is moved 25 basis points higher to .25% to .50%? In the most simple method, GC has averaged about .15% for the past month, which implies a GC rate around .40% after the Fed move. However, given the unprecedented amount of liquidity in the financial system, there’s a belief the Fed will have problems moving overnight rates higher. We have two quantifiable events over the past few years where the Fed moved Repo rates higher or lower: quarter-end and the QE programs.

Given there are so many moving parts, consider these to be very rough estimates: Beginning in 2015, when funding pressure began each quarter-end, the market, on average, took approximately $255B additional collateral from the Fed and, on average, GC rates averaged 20.5 basis points higher. In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity.

If readers didn’t just have an “oops” moment, please reread the last bolded sentence until they do, because it explains precisely what the market is missing about the Fed’s rate hike cycle: according to Skyrm’s calculations, to push rates by a paltry 25 bps, the smallest possible increment, what the Fed will have to do is drain up to a whopping $800 billion in liquidity! Putting that in context, QE2 – which pushed the S&P higher from November 2010 until June 2011 – was “only” $600 billion. In other words, to “prove” to itself that it is in control and the economy is viable, the Fed will effectively conduct, via reverse repo, an overnight QE2…. only in reverse.

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Good way to phrase it: “[China’s] economy is expanding at the slowest rate in a generation..”

Bankruptcy Might Be the Mining Industry’s Last Best Hope (BBG)

For the world’s ailing metals-mining industry to have any hope of a turnaround, more producers may have to go belly up. Companies that dig up everything from gold to copper have failed to stem a prolonged collapse in mineral prices mostly because not enough mines are closing. Years of increased output have created global surpluses just as slower economic growth erodes demand. Unprofitable operations were kept alive by across-the-board cuts in operating costs, lower energy prices, a strong dollar and the unfulfilled hopes by mining executives that markets will improve. “We are going to see bankruptcies,” Evy Hambro at Blackrock’s $3.5 billion World Mining Fund said. “Some companies have been praying for commodity prices to deliver a kind of escape route from the problems that they face. That’s clearly gone the other way.”

While nobody expects industry giants such as Rio Tinto or BHP Billiton to go bust, higher-cost producers and those unable to raise more cash are vulnerable as a measure of base-metals prices heads for a third straight annual decline. The loss of value means more companies are getting closer to default, Moody’s Investors Service said Wednesday. There have been some production cuts, but the rout has deepened because companies are still supplying more metal than is needed around the world. Most mining executives don’t want to trim even unprofitable output because the resulting tighter supply and higher prices would benefit rivals. China, the world’s biggest metals user, has been mostly to blame for the price slump.

The Asian country’s economy is expanding at the slowest rate in a generation, curbing demand, just as new mines planned during an almost decade-long bull run in commodities are coming into operation. “We need to see supply cuts across these markets to try to bring them back into balance,” said Colin Hamilton at Macquarie in London. “It’s either companies making the decisions themselves, or it comes through a full process of people dying very slowly.” A gauge of contracts on the London Metal Exchange has slid 26% this year, the most since 2008, to near the lowest in six years. About 15% of copper production and a quarter of zinc output are unprofitable, while 60% of aluminum and 70% of nickel are supplied at a loss, according to Standard Chartered.

First-half profits slumped at least 30% for Rio Tinto, Glencore and Anglo American, while BHP Billiton’s full-year earnings slid 52%. The biggest producers have proved the most efficient at pumping out more material at lower costs, while smaller companies have struggled. “You’ve got to allow the markets to work,” Tom Albanese, CEO of Vedanta Resources and former CEO of Rio Tinto, said on Tuesday. “It creates a prisoner’s dilemma in terms of what it means for the broader sector, but it’s logical and it’s in the best interests of those companies.”

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“..half of the oil-and-gas junk debt trades at distressed levels..”

“Distress” in US Corporate Debt Spikes to 2009 Level (WolfStreet)

Investors, lured into the $1.8-trillion US junk-bond minefield by the Fed’s siren call to be fleeced by Wall Street and Corporate America, are now getting bloodied as these bonds are plunging. Standard & Poor’s “distress ratio” for bonds, which started rising a year ago, reached 20.1% by the end of November, up from 19.1% in October. It was its worst level since September 2009. It engulfed 228 companies at the end of November, with $180 billion of distressed debt, up from 225 companies in October with $166 billion of distressed debt, S&P Capital IQ reported. Bonds are “distressed” when prices have dropped so low that yields are 1,000 basis points (10 %age points) above Treasury yields.

The “distress ratio” is the number of non-defaulted distressed junk-bond issues divided by the total number of junk-bond issues. Once bonds take the next step and default, they’re pulled out of the “distress ratio” and added to the “default rate.” During the Financial Crisis, the distress ratio fluctuated between 14.6% and, as the report put it, a “staggering” 70%. So this can still get a lot worse. The distress ratio of leveraged loans, defined as the%age of performing loans trading below 80 cents on the dollar, has jumped to 6.6% in November, up from 5.7% in October, the highest since the panic of the euro debt crisis in November 2011. The distress ratio, according to S&P Capital IQ, “indicates the level of risk the market has priced into the bonds.

A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe, sustained market disruption. And the default rate, which lags the distress ratio by about eight to nine months – it was 1.4% in July, 2014 – has been rising relentlessly. It hit 2.5% in September, 2.7% in October, and 2.8% on November 30. This chart shows the deterioration in the S&P distress ratio for junk bonds (black line) and leveraged loans (brown line). Note the spike during the euro debt-crisis panic in late 2011. The oil-and-gas sector accounted for 37% of the total distressed debt and sported the second-highest sector distress ratio of 50.4%. That is, half of the oil-and-gas junk debt trades at distressed levels! The biggest names are Chesapeake Energy with $7.4 billion in distressed debt and Linn Energy with nearly $6 billion.

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All bubbles pop.

Hong Kong Housing Bubble Collapses, Sales Plunge 42% (ZH)

Over the weekend we reported that in the aftermath of China’s crackdown on capital controls, “Chinese buyers have left the U.S. housing market.” But if potential Chinese buyers are unable to transfer funds out of the mainland, it wouldn’t be just the U.S. and Australia where the housing bubble is now rapidly bursting, it would be everywhere else too as said potential buyers hunker down and instead scramble to avoid the government’s attention and to preserve dry powder. Sure enough, nowehere was this more clear overnight than in Hong Kong, where the once-upon-a-time raging housing bubble just got its last rites after November home sales sank to a record low as an imminent interest rate in the US this month scared away prospective buyers.

According to Land Registry data, reported by SCMP, November saw 2,826 registered residential transactions, down 14.4% from October and 41.7% less than in November last year. This was the lowest print in the history of the series. In terms of value, residential transactions dropped 7.7% month on month to HK$20.8 billion. “Total home sales including those in primary and the secondary market dropped to the lowest level since we have started to gauge property transactions in 1996,” said Wong Leung-sing, an associate director of research at Centaline Property Agency.

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“The legacy has left a $28 trillion debt pile hanging over an economy set to grow at the weakest pace since 1990…”

For China, The Real Battle For A Global Currency Is Just Beginning (BBG)

After a struggle of more than half a decade, China this week overcame doubts and objections to qualify for official reserve status for its currency, the yuan. Now, the real battle begins. Chinese officials who want a much bigger role for market forces – including central bank Governor Zhou Xiaochuan and his deputy Yi Gang – have used the goal as a lodestone for their ideas. In their campaign, the reformers won approval for gradually opening up the financial system to foreign participation and letting the private sector set interest rates. With the IMF’s decision on Nov. 30 to endorse the yuan for inclusion alongside the dollar, euro, pound and yen in the International Monetary Fund’s global currency basket, known as Special Drawing Right, or SDR, the reformers in one sense realized their ambition.

While meeting the IMF’s “freely usable” requirement, Chinese policy makers are still a long way from a “freely convertible” currency. That’s the long-term objective of the reformers seeking to overturn China’s state-directed lending model. The legacy has left a $28 trillion debt pile hanging over an economy set to grow at the weakest pace since 1990. The People’s Bank of China’s Yi Gang was quick to highlight the unfinished business. “We are still relatively far from the world’s developed markets,” Yi told reporters in Beijing hours after the IMF announcement. “Joining the SDR also means that the international community will have more expectations for China in many financial and economic aspects, so we also feel that the burden on our shoulders is heavier.”

The financial system is a key battleground between Zhou, Yi and their allies and the Communist Party stalwarts who advanced in the state-owned enterprise world and want to keep the old structure of a planned economy. Opponents maintain their anonymity in a system where the party is supposed to be moving forward as one. The Communist leadership agreed in the new Five Year Plan for the economy to move toward yuan convertibility by 2020. Those next steps will be fraught with risk — the global economy is littered with a trail of examples that illustrate what can go wrong when the sequencing of capital-account opening is fumbled. It took Japan 40 years to complete big reforms to its exchange rate, interest rates and financial sector only to see an asset bubble swell, then burst and crash the economy for two decades.

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Xi’s hubris reaches far and deep. The more control he wants, the more problems he gets.

Top China Cop Targets Bankers After Putting Away Security Czar (BBG)

The high-ranking cop who brought down one of China’s top Communist Party officials has been put in charge of a corruption probe of the securities industry in the wake of a summer stock crash, said a person familiar with the matter. The appointment of Fu Zhenghua underscores the importance that President Xi Jinping has given the investigation into possible securities fraud linked to the $5 trillion wipeout in June and July. Fu has had several promotions since Xi came to power in 2012, and oversaw the case against former Politburo Standing Committee member Zhou Yongkang, said three people familiar with the case, who asked not to be identified because Fu’s role hasn’t been made public. Zhou was sentenced to life behind bars in June.

The 60-year-old former Beijing police chief, who also led a corruption case against one of China’s richest men and busted a huge prostitution ring in 2010, is overseeing a probe under which police have questioned dozens of executives at securities firms amid allegations of insider trading and other malfeasance stemming from the crash, one of the people said. The investigations have intensified in recent weeks, sending fear through China’s finance firms and chilling their investment strategies. “Fu is a capable assistant to Xi because his cutthroat style would help the investigation get to the very bottom of things, and to make sure things under Xi’s full control,” said Zhang Lifan, a political commentator. “An investigation into the financial sector could easily damage the interests of some power havens, and Fu is more than qualified to fight Xi’s battle as he’s famous for not being afraid of offending anyone.”

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“US leaders’ ignorance, or disregard, of history created with the invasion of Iraq not just an illegitimate and uncalled for war of choice, but a dislocation of an existing balance..”

America’s Leadership Just Doesn’t Seem To Get It (Tanosborn)

As we fail to identify the causes that bring about what we call terrorism, we also fail to realize that such causes also bring higher ideological Causes: goals and principles that are served with dedication and zeal by a militant leadership that we simplistically term as terrorists, and the connotation which allows us in the West to don righteousness while placing the entire blame of any regional turmoil on “them.” And that region in turmoil now extends beyond the Near East/Middle East, with dissatisfaction branching out from Afghanistan (east) to Morocco (west) by diverse cultures faithful to Islam and highly influenced by the success being achieved by the Islamic State (IS). Under the auspices of the UN, and the diplomatic leadership of John Kerry (US) and Sergei Lavrov (Russia), a plan to stabilize Syria has just been drafted in Vienna; a plan that’s inclusionary of all but one feuding group.

That exception being ISIS/ISOL, by whatever acronym one wishes to know the new and resolute Islamic State, now holding major swathes of territory in Iraq and Syria, while establishing itself as the purveyor of extra-territorial reaches and ambition in the creation of a caliphate. But stabilizing Syria, as important as that would be after a devastating civil war, won’t begin to cure the geopolitical problems in that part of the world; problems that were ignited by an Imperial Britain six-plus decades ago, later adopted and enlarged by an equally ambitious and powerful Imperial America. Problems which have not only deep economic roots but extensive foliage cover of prejudice, lies and deceit. Britain and the US have played havoc in the Middle East, creating geographic borders, sitting and deposing rulers at will, and meddling forcefully in the region’s geopolitics.

Meddling which achieved the pinnacle of idiocy with George W. Bush’s invasion of Iraq and deposition of Saddam Hussein, a dictator with lay roots who had long maintained some political balance in the region. By far the greatest mistake ever in the annals of American foreign policy, one which will leprously follow into history a not-very-bright president who did totally depend for his decisions on a cadre of advisers proven to be not exactly political luminaries themselves (Dick Cheney, Don Rumsfeld and perhaps the archetype of the Peter principle, Colin Powell, at the helm). US leaders’ ignorance, or disregard, of history created with the invasion of Iraq not just an illegitimate and uncalled for war of choice, but a dislocation of an existing balance of cultures, religion, ethnicities and ruling socio-economic power.

In the decade following the invasion, the vengeful Shia majority, who came into power with both the vote and US help, helped create fertile grounds for a Sunni insurgency under proven leadership from capable, former members of Saddam Hussein’s government. Except that this time around, these insurgents are looking at religion, Islam, as the main motivator for their existence, the glue that makes them stay strong and together – fanatically so in the view of most non-Islamic people. And that, nothing else, is the Islamic State in search of its identity, a modern day caliphate… brought to the world courtesy of George W. Bush.

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There are many poor countries and athletes participating.

It’s So Bad in Brazil That Olympians Will Have to Pay for Their Own AC (BBG)

The Brazilian economic crisis has finally hit the 2016 Olympics. Following a new round of cost-cutting by the Rio 2016 organizers, athletes will be asked to pay for the air conditioning in their dorm rooms. Stadium backdrops will be stripped to their bare essentials. Fancy cars and gourmet food for VIPs are out. “The goal here is to organize games without public funding and to organize games that make sense from an economic point of view,” Rio 2016 spokesman Mario Andrada said in an interview. That economic focus has changed radically in the six years since Rio was awarded the Games – South America’s first. At the time, Brazil’s government pledged $700 million toward any budgetary overrun. Then the economy tanked. Unemployment has soared, and the local currency, the real, has lost one-third of its value against the dollar in the last year.

Now, with costs that ran up to 2 billion reais ($520 million) over budget and the public commitment in doubt, the organizers must stick firmly to the 7.4 billion reais they expect to earn from sponsorships, ticket sales, and a grant from the International Olympic Committee. Final decisions on what to pare back and how much should be finalized by next week, Andrada said. By the time the Games begin, the committee plans to have 500 fewer paid staff than the 5,000 it originally expected. The deepest cuts will probably come from operational areas like catering, transportation and cleaning services.

Shifting the cost for air conditioning and other amenities from the host city to each nation’s Olympic committee – or to the athletes themselves – is a big deal, said Nick Symmonds, a two-time Olympic runner. “The world wants to tune in and watch the world’s greatest athletes compete at the absolute highest level,” Symmonds said. “If you don’t provide them with good food, a good place to sleep and comfortable temperature, they won’t be able to recover and bring the A-plus product that the world is demanding. To cut the budget on athletes’ hospitality and comfort, that’s just going to cheapen the games.”

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Now he’s Monsanto’s no. 1 enemy as well.

Putin Wants Russia To Become World’s Biggest Exporter Of Non-GMO Food (RT)

Russia could become the world’s largest supplier of ecologically clean and high-quality organic food, said President Vladimir Putin on Thursday. He also called on the country to become completely self-sufficient in food production by 2020. “We are not only able to feed ourselves taking into account our lands, water resources – Russia is able to become the largest world supplier of healthy, ecologically clean and high-quality food which the Western producers have long lost, especially given the fact that demand for such products in the world market is steadily growing,” said Putin, addressing the Russian Parliament on Thursday. According to the President, Russia is now an exporter, not an importer of food.

“Ten years ago, we imported almost half of the food from abroad, and were dependent on imports. Now Russia is among the exporters. Last year, Russian exports of agricultural products amounted to almost $20 billion – a quarter more than the revenue from the sale of arms, or one-third the revenue coming from gas exports,” he said. Putin said that all this makes Russia fully capable of supplying the domestic market with home-grown food by 2020. In September, the Kremlin decided against producing food products containing genetically modified organisms (GMOs). Russia imposed an embargo on the supply of products from the EU and the United States as a response to Western sanctions. After Turkey shot down Russian Su-24 bomber, Russian authorities decided to ban the import of fruit, vegetables and poultry from Turkey. The ban will take effect from January 1.

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“Unlike fossil fuel developments [..]..most renewable projects have to be entirely capital funded up front..”

Financial Engineering To Save The Planet (Kaminska)

One of the problems with green energy finance is the nature of the asset. Unlike fossil fuel developments, which spread the capital cost of development and production across the lifespan of the asset, most renewable projects have to be entirely capital funded up front. According to Citi’s Anthony Yuen and Ed Morse, that means the cost of financing is the key determinant in making these projects competitive and viable — an increasingly pressing objective in the context of falling fossil fuel prices, which reduce the competitive position of renewables in the energy complex. In an upcoming report, Financing a Greener Future, the experts even argue it’s probably a more important determinant than changes in global climate change policy.

The COP21 meeting in Paris matters, but – says the report –bottom up, local and national policies matter more. In fact, what the climate change campaigners in Paris may never have bargained for is the degree to which fossil fuel abundance and elasticity has disrupted the economic incentives associated with going green. For renewables, it’s arguably even worse, because the real cost comparison isn’t even oil, it’s even cheaper coal or natural gas. From Citi: ”

As gas prices have continued their march lower in the midst of staggering productivity gains in hydraulic fracturing, gas’s inroads into coal’s once safe territory have gone farther. Additionally, new environmental regulations, such as the Clean Power Plan that more strictly regulates coal pollution, have added liability to building new coal plants and forced more coal-fired power plants to retire In the rest of the world, however, the story is very different. In nearly every economy except the US, coal remains a much cheaper source of power generation.

Even in Europe, with a €9/ton carbon burden, burning coal is still far more profitable than burning gas, due in large part to the high costs of imported gas (see below chart). In addition to oversupply, mining costs have compressed by 30% in the last three years, even with lower prices, cushioning producers. The prospects for significant increases in coal pricing that might hinder the competitiveness of renewables or gas appear limited, and hinge crucially on India and China. In the US, cheap natural gas should keep a tight lid on coal prices, limiting prospects for significant uplift.

Even if China moves to curb its coal consumption, Citi’s team expects the demand drop — by making coal even cheaper than before — will simply fuel more coal consumption in other economies such as India. Indeed, with low coal prices actually undermining the case for renewables, Citi’s Yuen tells FT Alphaville it’s only lower financing costs that can give the sector the boost it needs. So what sort of financial innovation is needed or even possible in this sector? Err.. mostly, it turns out, the sort involving public balance sheets and government de-risking. Quelle surprise.

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That frontpage is a keeper.

Denmark Rejects Closer EU Ties as Skeptics Dominate Referendum (BBG)

Danes voted to keep their distance from the European Union, marking a blow to Brussels before heads of government meet to discuss British demands for a renegotiated relationship with the 28-member bloc. Denmark will preserve an opt-out from EU justice and home affairs laws, with 53% of voters in favor of the status quo, while 47% back a shift to a flexible opt-in, according to state broadcaster Danmarks Radio. The result “is based on a general skepticism toward the EU,” said Prime Minister Lars Loekke Rasmussen. At stake is the ability to coordinate everything from tracking cyber crime to ensuring family disputes get the same legal treatment across EU borders. The center-right government argues that failure to agree to a flexible opt-in arrangement means Denmark will forfeit its automatic participation in Europol, which changes its status next year to become an EU institution.

“If we’re to fight cross-border crime, I think one has to say that Denmark needs to be part of this union,” Rasmussen said in an interview with broadcaster TV2. His “yes” campaign was supported by the Social Democrats, the largest opposition party. But the more vocal “no” side warned against giving up sovereignty to an EU it says is becoming more bureaucratic in pushing agendas that are remote to the average Dane’s interests. The latest Eurobarometer shows 33% of Danes associate the EU with bureaucracy. Only the Czech Republic, Finland and Sweden have a lower opinion of the bloc’s administrative evils. But by far the majority of Danes – 70% – think they’re better off inside the EU than outside.

Denmark has held seven referenda since becoming an EU member in 1973. The country most recently voted in favor of adopting EU patent laws. Thursday’s vote was on one of four exemptions Denmark secured in 1993. The others concern monetary union, defense and citizenship. Polls have consistently shown Danes would reject any attempt to do away with their currency opt-out. Instead, the central bank pegs the krone to the euro in a 2.25% band.

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The EU is so woefully lacking, one would think they do it on purpose.

Greece Asks EU For Help With Refugees Following Threats (Kath.)

In the wake of pressure regarding its membership of the Schengen Area, Greece on Thursday activated the European Union Civil Protection Mechanism, agreed to allow EU border agency Frontex on its frontier with the Former Yugoslav Republic of Macedonia (FYROM) and to trigger the Rapid Border Intervention Teams mechanism (RABIT) for extra help with patrols in the Aegean. The European Commission confirmed Thursday that it received these three requests from Athens. The action came after a number of unnamed EU officials claimed that there were calls for Greece to be excluded from the Schengen free travel area because of complaints about the way it is handling the flow of migrants and refugees and its failure to live up to commitments made at the Western Balkans Route Leaders’ Summit in October.

The EU Civil Protection Mechanism allows Greece to benefit from material support. Alternate Minister for Migration Policy Yiannis Mouzalas said Thursday that Athens had not made the request for assistance earlier because it needed to assess its needs first. “We did not know exactly what we needed and, more importantly, how we would use what we asked for,” he said at a news conference. Greece sent a list containing 23 categories to Brussels. Among the things the government is asking for are 26 ambulances, six water pumps, four diesel-powered generators, 500 large all-weather tents, 100,000 waterproof jackets, 50,000 woolen blankets, 100,000 sleeping bags and 100,000 first-aid kits.

The agreement with Frontex will see the border agency provide personnel to help register refugees and migrants at Greece’s border with FYROM, where some 6,000 people have now amassed as a result of Skopje refusing to allow anyone except Syrians, Iraqis and Afghans, who can qualify as refugees, through. The situation in the Greek border village of Idomeni is becoming increasingly tense, with clashes breaking out between refugees and migrants from countries such as Iran, Pakistan and Morocco. A man believed to be from Morocco was fatally electrocuted after touching high-power railway cable when he climbed on top of a train. “There will be a solution soon for Idomeni,” said Mouzalas. “We are trying to convince people to return to Athens.”

[..] Mouzalas rejected claims that the Greek government is unwilling to work with Frontex. He said Athens had rejected the idea of Frontex guards patrolling Greece’s border with FYROM but had repeatedly asked for more help from the agency in other areas. “In May, we asked Frontex for 318 people but less than 100 are currently involved in operations,” he said. “On September 25, we asked for 1,600 people and we have so far not received any response.”

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“Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!”

Surprisingly good piece as Bloomberg wakes up to the reality in Greece. But the EU does not, and won’t.

World’s Woes Huddle on Greek Shores as Another Crisis Year Looms (BBG)

Sotiris Alexopoulos has been helping the desperate and destitute spawned by Greece’s economic free fall since he lost his job in 2010. This year, he began catering to a new group of stricken people: the thousands of refugees arriving at the port of Piraeus. “We are like them, we had the same needs,” Alexopoulos, 65, said as he helped distribute food and clothing to some of the 1,400 who had traveled overnight on a ferry from the island of Lesvos, their entry point to Europe. “We are the poor people doing something to help ourselves.” Alexopoulos and the 350-strong network of volunteers mark the nexus of the financial and humanitarian crises stalking the 28-nation European Union. Greece, dependent on international rescue money since 2010, is the soft underbelly of a continent straining to shelter the almost 900,000 asylum-seekers who landed on European shores this year.

As it enters 2016, the country remains as vulnerable to economic catastrophe as it is defenseless against the torrent of people fleeing Syria and other war zones. “Greece isn’t out of the danger zone,” said Panagiotis Pikrammenos, who led a caretaker government in 2012 when Greece’s cash shortage risked unraveling the euro. “The coming months will be a make-or-break moment.” After six years of recession and austerity, the economy is still a mess. Banks are restricting withdrawals, pensions are whittled and unemployment remains around 25 percent. The government is relying on an ever-slimmer majority in parliament to pass more of the legislation required in the most recent aid deal. But at least there was a deal and the bailout money is flowing. The latest spending cuts tied to keeping Greece in the euro are only now kicking in and workers held their second general strike in less than a month this week.

The measures are the result of a dramatic capitulation by Prime Minister Alexis Tsipras at a 17-hour overnight summit in July when his euro-area counterparts refused to budge from their austerity demands. European leaders have long since turned their attention to stemming the flow of people from the war in Syria and, with them, any potential terrorists. Border checks following the Nov. 13 massacre in Paris are effectively undoing Europe’s Schengen agreement on the passport-free movement of people. Before the summer, EU powwows dedicated to refugees passed with a fraction of the attention given to the drama unfolding over Greece. As Tsipras prepared to meet German Chancellor Angela Merkel on April 23, more than 700 migrants drowned when their boat sank off Libya, a harrowing portent of what was to come.

While bureaucrats worked through nights poring over spreadsheets in the spring and early summer, Sakellarios Billiris spent them lifting corpses out of the Aegean. Billiris is the harbor master on Leros, where about 200 refugees – the lucky ones – most days first set foot in the EU after making the perilous trip from Turkey. “We were pulling overnighters throughout these months and we weren’t sitting at a table,” said Billiris, 50. “We were out in the sea, in the cold, carrying bodies.” The Greek Coast Guard is on the front line of Europe’s gathering woes. The refugees keep coming while budget cuts mean paying for fuel and equipment is getting tougher. There’s also the opposition to immigrants in a country where the far-right Golden Dawn party placed third in Greece’s two elections this year. “When you have 500 people outside at your yard yelling, crying, starving and you have some people on the other side yelling ‘immigrants out,’ it’s hard,” said Billiris. “No one at the time saw the immigration crisis with the gravity it needed to be looked at.”

Greece has spent €1.5 billion from its over-stretched budget on rescuing refugees and giving them accommodation, food and health care, Immigration Policy Minister Ioannis Mouzalas said this week. It’s now starting to access the EU money allocated to the country, but it’s not enough, he said.

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Sep 252015
 
 September 25, 2015  Posted by at 8:41 am Finance Tagged with: , , , , , , , , , , ,  3 Responses »


DPC Bromfield Street in Boston 1908

The “QE Infinity Paradox”, Or “The Emperor Is Naked, Long Live The Emperor” (ZH)
Yellen Expects Fed To Raise Interest Rates By End Of Year (Guardian)
Caterpillar, Crunched By Commodities Collapse, To Slash 10,000 Jobs (Forbes)
The Stock Markets Of The 10 Largest Global Economies Are All Crashing (Snyder)
Sweden’s Top Economist Puts China’s GDP Growth At 3% (Forbes)
China Becomes Asia’s Biggest Securitization Market (WSJ)
Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy (AP)
Refugees Keep Streaming In As Europe Seeks To Stem The Tide (Reuters)
EU Refugee Deal Barely Scratches Surface Of Crisis Still In Infancy (Guardian)
German Government Boosts Funding To States For Refugees (Reuters)
Germany Battles Past Ghosts as Merkel Urges Greater Global Role (Bloomberg)
ECB Faces Defiance on Bank Oversight as Germany Hoards Power (Bloomberg)
Volkswagen To Start Firings Over Emissions Scandal On Friday (Reuters)
VW Faces Deluge Of UK Legal Claims (Guardian)
Europe Claims It Will Embrace Real-World Emissions Testing (WSJ)
German Greens Claim Merkel Government Knew Emissions Tests Were Rigged (Ind.)
Canadian Dollar Hits 11-Year Low And Just Keeps Falling (FinPo)
Australia Pays the Price for Depending on China (Bloomberg)
Time To Dig Deep? Big Miners Face A Big Problem (Guardian)
US Energy Lending Caught in a Squeeze (WSJ)
Oil Companies in Europe Seek Creative Funding as Lenders Retreat (Bloomberg)

More and more people figure out what I wrote ten days ago: in the end it’s all about credibility, which the Fed is rapidly losing through its (non-)actions.

The “QE Infinity Paradox”, Or “The Emperor Is Naked, Long Live The Emperor” (ZH)

Perhaps the most important thing to understand about what was widely billed as the most important FOMC decision in recent history, is that by “removing the fourth wall” (to quote Deutsche Bank), the Fed effectively reinforced the reflexive relationship between its decisions, economic outcomes, and financial market conditions. In simpler terms, differentiating between cause and effect is now more difficult than ever as Fed policy affects markets which in turn affect Fed policy and so on. This sets the stage for any number of absurdly self-referential outcomes. For instance, the Fed needs to remain on hold to guard against the possibility that a soaring dollar triggers an EM meltdown that would then feed back into developed markets, forcing the FOMC to reverse itself.

But delaying liftoff sends a downbeat message about the state of the US economy which triggers the selling of domestic risk assets. Hiking would solve this as it would signal the Fed’s confidence in the outlook for the US economy, but that would be USD-positive which is bad news for EM. A similarly absurd circular dilemma presents itself if we take the view that the Fed missed its window to hike and is now creating more nervousness and uncertainty with each meeting that passes without liftoff. Here’s how former Treasury economist Bryan Carter put it to Bloomberg: “short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses.

They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.” When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market’s natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies.

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Keeping everyone hanging in suspension eventually will backfire.

Yellen Expects Fed To Raise Interest Rates By End Of Year (Guardian)

Federal Reserve chair Janet Yellen has made clear that she expects US interest rates to be raised from their current record low before the end of the year.In an extensive 40-page speech Yellen set out the case for raising rates – for the first since 2006 – as she expects inflation will gradually move up to the Fed’s target rate of 2% as the unusually low oil price rises and strong dollar weakens.“I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective,” she said during a speech in Amherst, Massachusetts, on Thursday.

Her comments come just a week after Fed policymakers voted to keep interest rates at near-zero – where they have been since the 2008 financial crisis – and she warned that the US economy was not yet strong enough to withstand “recent global economic and financial developments” following a worldwide markets slump due to concerns about the health of the Chinese economy. On Thursday Yellen suggested that the current global economic weakness will not be “significant” enough to alter the Fed’s plans to raise its key short-term rate from zero by December. “Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal,” Yellen said.

“But I expect that inflation will return to 2% over the next few years as the temporary factors weighing on inflation wane.” Yellen also warned that if rates were kept low it could lead to excessive risk taking. “Continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability,” she said. “The more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.”

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Look out below. America’s benchmark stock is cratering.

Caterpillar, Crunched By Commodities Collapse, To Slash 10,000 Jobs (Forbes)

That machinery and manufacturing giant Caterpillar has suffered its fair share of disappointing sales and earnings in recent years is no secret and yet an announcement it made Thursday morning still proved to be an unpleasant surprise for both its employees and its shareholders. Caterpillar said Thursday that its full-year sales and revenue for 2015 and 2016 have weakened, with 2016 revenue now projected to be 5% lower than 20152 s already-diminished levels. In an attempt to soften this blow to shareholders, the company also announced that it will undergo significant restructuring and cost savings initiatives, an effort that could see as many as 10,000 job cuts over the next three years.

Caterpillar said Thursday that it now expects 2015 revenue to come in around $48 billion, down from the prior forecast of $49 billion. For 2016, it said, sales and revenue are expected to be 5% lower than 2015 levels. The company admitted that this year’s decline in sales is its third consecutive down year for sales and revenues; if this trend continues, 2016 would mark the first time in the company s 90-year history that sales and revenues have decreased four years in a row. In an effort to compensate for these declines and save $1.5 billion annually, Caterpillar also said Thursday that it will undergo “significant restructuring and cost reduction actions” and these actions include a significant number of job cuts. Specifically, as many as 10,000 layoffs by the end of 2018.

The bulk of the cuts will come in the short-term, though: the company said it expects to permanently reduce its salaried and management workforce by 4,000 to 5,000 positions by the end of 2016, with most of those cuts occurring this year. The additional 5,000 to 6,000 cuts could occur as Caterpillar gradually closes and consolidates certain manufacturing facilities over the next three years. “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors. namely in mining and energy”, Doug Oberhelman, Caterpillar chairman and CEO, said in a statement. “While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don’t make these decisions lightly, but I’m confident these additional steps will better position Caterpillar to deliver solid results when demand improves.”

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That’s a lot of dough going Poof!

The Stock Markets Of The 10 Largest Global Economies Are All Crashing (Snyder)

You would think that the simultaneous crashing of all of the largest stock markets around the world would be very big news. But so far the mainstream media in the United States is treating it like it isn’t really a big deal. Over the last sixty days, we have witnessed the most significant global stock market decline since the fall of 2008, and yet most people still seem to think that this is just a temporary “bump in the road” and that the bull market will soon resume. Hopefully they are right. When the Dow Jones Industrial Average plummeted 777 points on September 29th, 2008 everyone freaked out and rightly so. But a stock market crash doesn’t have to be limited to a single day.

Since the peak of the market earlier this year, the Dow is down almost three times as much as that 777 point crash back in 2008. Over the last sixty days, we have seen the 8th largest single day stock market crash in U.S. history on a point basis and the 10th largest single day stock market crash in U.S. history on a point basis. You would think that this would be enough to wake people up, but most Americans still don’t seem very alarmed. And of course what has happened to U.S. stocks so far is quite mild compared to what has been going on in the rest of the world. Right now, stock market wealth is being wiped out all over the planet, and none of the largest global economies have been exempt from this. The following is a summary of what we have seen in recent days…

#1 The United States – The Dow Jones Industrial Average is down more than 2000 points since the peak of the market.
#2 China – The Shanghai Composite Index has plummeted nearly 40% since hitting a peak earlier this year.
#3 Japan – The Nikkei has experienced extremely violent moves recently, and it is now down more than 3000 points from the 2015 peak.
#4 Germany – Almost one-fourth of the value of German stocks has already been wiped out, and this crash threatens to get much worse.
#5 The United Kingdom – British stocks are down about 16% from the peak of the market, and the UK economy is definitely on shaky ground.
#6 France – French stocks have declined nearly 18%.
#7 Brazil – Brazil is the epicenter of the South American financial crisis of 2015.
#8 Italy – Watch Italy. Italian stocks are already down 15%, and look for the Italian economy to make very big headlines in the months ahead.
#9 India – Stocks in India have now dropped close to 4000 points, a nd analysts are deeply concerned as global trade continues to contract.
#10 Russia – Even though the price of oil has crashed, Russia is actually doing better than almost everyone else on this list.

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“If you really want to know what is going on in China’s markets, there is no better research method than walking down the street ..”

Sweden’s Top Economist Puts China’s GDP Growth At 3% (Forbes)

China’s economy is officially growing at 7%, but few economists actually believe that number to be accurate. Mauro Gozzo, chief economist at Business Sweden – an organization jointly owned by the government and the business community – estimates that the real growth of China’s gross domestic product is just 3%.“China is wrestling with serious economic difficulties and our estimates place the actual growth at a much lower rate than the official data,” he said in a new report. “We have often pointed out that the official statistics should be taken with a grain of salt.”According to Gozzo, the slowdown is the result of failed economic policies, which has brought to light the impossibility of combining a market economy with central planning.

For example, the country has seen the real appreciation of the currency during the last two years, which is part of the government’s rebalancing of the economy from exports and investments to private consumption. But it has also weakened the industry.“The rebalancing may have been necessary,” he said. “But dealing with the imbalances between the various sectors of the economy has become a big headache for the Chinese administration.”He added that the devaluation of the yuan in August was not sufficient, and should rather be seen as a signal that China is no longer intent on following the upward movement of the dollar.At the same time, consumption is being held back by factors like a housing bubble, the system of resident permits, and the absence of social support systems.

Although the plunge in the stock market, which has more than wiped out all of the gains of this year, has had limited repercussions on many households, the negative effects on the financial system are hardly negligible, he said. Gozzo also said that China’s official growth of industrial production of around 6% is “strongly exaggerated.” A number of other indicators, like the consumption of electricity, domestic cargo volumes and manufacturing activity, indicate much lower production.“The industry is wrestling with difficulties, but services are doing better and one good reason why the economy as a whole is still growing.”“It is now clear that China is struggling with a number of economic deficiencies and we believe that the actual growth rate is more likely 3%, not 7%,” Gozzo concluded.

Also Oxford Economics, which has used a model based on alternative indicators, estimating the actual growth this year to around 3-4%. New York-based Evercore ISI, which is using its own GDP equivalent index, goes even further and puts the annual growth at -1.1%, or rather a contraction. The high level of uncertainty actually makes many economists say it’s more or less pointless to look at China’s economy data. Matthew Crabbe, author of the book “Myth-busting China’s number”, points out that the country has a century-long history of secrecy and number-fudging and that the top-line GDP figure is “increasingly meaningless” for China. “If you really want to know what is going on in China’s markets, there is no better research method than walking down the street and watching what really goes on”, he said.

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Rocking the Ponzi.

China Becomes Asia’s Biggest Securitization Market (WSJ)

China’s fledging securitization market is soaring, as Beijing looks for new ways to ease lending to firms amid the country’s slowest period of economic growth in more than two decades. In the past few months, Chinese officials have laid out new rules to expand and quicken the process for car makers and other lenders to issue debt by bundling together pools of underlying loans. Issuance of asset-backed securities in the world’s second largest economy rose by a quarter in the first eight months of 2015—to $26.3 billion from $20.8 billion in the same period last year, according to data publisher Dealogic. Though the Chinese securitization market took flight just last year, it has already become Asia’s biggest, outpacing other, more developed markets like South Korea and Japan.

Asset securitization helps free up capital from banks or financing firms to support smaller businesses and projects that typically have less credit available to them. Leading the drive are state-owned and medium-size lenders seeking to unload loans from their books by packaging them into products known as collateralized loan obligations. Such firms account for the bulk of the market—CLO issuance totaled $20.9 billion between January and August, a third more than $15.9 billion over the same period last year. While securities backed by auto loans comprise a smaller piece of the market, issuances from the financing units of car makers including Ford and Volkswagen have increased fivefold to $4 billion from January through August, compared with $1.8 billion over the same period last year.

The State Council, China’s cabinet—which sets the country’s total issuance of asset-backed securities—said in May it would allow companies to issue up to 500 billion yuan ($80 billion) of such securities. That compares with $49 billion in all of 2014. The central bank and the banking regulator also will speed up the process by allowing select borrowers to issue securities after registering with regulators. Previously, each issuance had to be approved on a deal-by-deal basis.

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Lost it. A three-year gross failure leads to: “Tomorrow will definitely be better than today!”

Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy (AP)

Japan’s prime minister Shinzo Abe, fresh from a bruising battle over unpopular military legislation, announced Thursday an updated plan for reviving the world’s third-largest economy, setting a GDP target of 600 trillion yen ($5 trillion). Abe took office in late 2012 promising to end deflation and rev up growth through strong public spending, lavish monetary easing and sweeping reforms to help make the economy more productive and competitive. So far, those “three arrows” of his “Abenomics” plan have fallen short of their targets though share prices and corporate profits have soared. “Tomorrow will definitely be better than today!” Abe declared in a news conference on national television.

“From today Abenomics is entering a new stage. Japan will become a society in which all can participate actively.” Abe recently was re-elected unopposed as head of the ruling Liberal Democratic Party. He has promised to refocus on the economy after enacting security legislation enabling Japan’s military to participate in combat even when the country is not under direct attack. Thousands of Japanese gathered for noisy street protests last weekend over the “collective self-defense” law, and Abe’s popularity ratings took a hit. “He has to deliver the message that he is so committed to achieving the economic agenda, that is, to make people’s lives better,” said analyst Masamichi Adachi of JPMorgan in Tokyo.

Abe said he was determined to ensure that 50 years from now the Japanese population, which is 126 million and falling, has stabilized at 100 million. He said his new “three arrows” would be a strong economy, support for child rearing and improved social security, to lighten the burden of child and elder care for struggling families. But with Japan also committed to reducing its massive public debt, it is unclear how he intends to achieve those goals. “There’s nothing wrong with him saying he wants to achieve a better life for everybody. But how to achieve it is a different matter,” Adachi said.

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Europe is setting itself up for something truly epic.

Refugees Keep Streaming In As Europe Seeks To Stem The Tide (Reuters)

A tide of refugees from the Middle East and Asia showed no sign of abating on Thursday, after European Union leaders began the task of trying to prevent tens of thousands of people fleeing war or poverty from streaming unchecked through the continent. After weeks of recrimination and buck-passing, a summit on Wednesday produced a glimmer of political unity on measures to help the refugees closer to home, or at least register their asylum requests as soon as they enter the EU. However, all attempts in recent weeks to stem the flow have only prompted more desperate people to make a dash for Europe before the doors are shut or winter makes the trip too perilous.

On Thursday, about 1,200 crossed from Turkey to the Greek island of Lesvos on 24 boats in under an hour, following the 2,500 who had made the dangerous crossing the previous day. Weeks ago, most would have found the quickest route into the EU and their preferred destination of Germany was from Serbia into Hungary. But since Hungary took unilateral action by sealing its border with razor-wire, an overwhelmed Serbia has passed the problem to the EU’s newest member, Croatia, which says it also cannot keep pace with the influx. Demanding that Serbia send at least some of the refugees and migrants to Hungary or Romania, Croatia barred all Serbian-registered vehicles from entering. Serbia compared those restrictions to racial laws enforced by a Nazi puppet state in Croatia in WWII.

It blocked Croatian goods and cargo vehicles in the escalating dispute, which has dragged relations between the former Yugoslav republics to their lowest ebb since the overthrow of Serbian strongman Slobodan Milosevic in 2000. Money for middle east. In an attempt to forestall such rows, EU leaders on Wednesday night pledged at least €1 billion for Syrian refugees in the Middle East and closer cooperation to stem the flow of people. The summit also decided that EU-staffed “hotspots” would be set up in Greece and Italy by November to register and fingerprint new arrivals and start the process of relocating Syrians and others likely to win refugee status to other EU states, while deporting those classed as economic migrants.

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All cowards lack vision.

EU Refugee Deal Barely Scratches Surface Of Crisis Still In Infancy (Guardian)

Following a bruising fight this week to agree a new quotas regime sharing 120,000 refugees across Europe, EU policymakers say that by Christmas member states will be embroiled in much bigger battles over how to distribute up to a million newcomers. The signals emerging from two days of summitry in Brussels on Tuesday and Wednesday and days of non-stop negotiations behind the scenes suggest that the EU’s biggest refugee crisis is but in its infancy, and that Europe’s agony has barely begun. The meetings of leaders and interior ministers produced breakthrough decisions in EU policy terms, but at the same time they hardly scratched the surface of an emergency whose scale is predicted to balloon by the end of the year.

A Brussels summit that ended early on Thursday began to heal the divisions and cool the tempers that have flared for months over what to do about immigration, fragmenting the union between east and west, north and south, big and small. The leaders did not decide very much but managed to communicate more civilly with one another, unlike in June when they engaged in an unseemly bout of recrimination until 3.30am. The breakthrough came on Tuesday when EU interior ministers employed the blunt instrument of a majority vote to impose refugee quotas against the will of four central European countries and despite the strong reservations of many others and widespread doubts over whether compulsory sharing will work. “We don’t believe it will ever be implemented,” said a senior diplomat in Brussels.

It was a damaging and divisive exercise in which Berlin, Brussels, and Paris prevailed. The European commission, the initiator of the quotas idea, thinks it has set a precedent for future action. But the experience was traumatic for some and the question is will it ever be repeated, especially when the numbers are likely to be much higher the next time. Donald Tusk, the conservative Polish politician and European Council president who chaired the summit, did not convene the emergency session until he had visited the camps holding four million Syrians in Jordan, Lebanon, and Turkey. He seems to have been shocked by what he found. Following the summit he said the “tide” of refugees coming to Europe would get much bigger. He seems certain that almost all of those in the camps are determined to head for the EU and that the refugees have convinced themselves they are welcome.

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Here’s wondering what to think of the entire EU throwing €1 billion at the issue this week, but Germany spending much more than that at home.

German Government Boosts Funding To States For Refugees (Reuters)

The German government agreed on Thursday to give its 16 regional states around €4 billion next year to help them cope with a record influx of refugees that is straining their budgets and resources. Chancellor Angela Merkel made the announcement after meeting state premiers to discuss ways of helping the states, which are struggling to look after 800,000 asylum seekers expected this year alone. Merkel said the government would pay the states €670 each month for every asylum seeker they took in. Sources from her SPD coalition partner indicated that the package could be worth around €4 billion once extra payments for providing social housing and looking after unaccompanied young refugees were taken into account.

The government had previously pledged to offer the states €3 billion for next year to help cover the additional costs of housing and caring for the refugees and asylum seekers. German public opinion has been divided on the rising numbers of new arrivals, with some warmly welcoming people fleeing conflict in the Middle East and Africa but others concerned about how easily they can be integrated. Merkel told the German parliament earlier on Thursday that the European Union needed the support of the United States, Russia and countries in the Middle East to help tackle the underlying causes of the refugee crisis. Merkel has been criticized by some eastern EU neighbors for what they see as actions that have fueled the influx of people trying to reach Germany.

As well as feeding and housing the newcomers, Germany is also weighing their impact on Europe’s largest economy. Finance Minister Wolfgang Schaeuble said he still aimed to maintain a balanced budget next year. Some lawmakers have questioned whether that will be possible given the rising costs associated with the migrant crisis.

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How much worse could timing get? Has Merkel shifted to “attack is the best defense”?

Germany Battles Past Ghosts as Merkel Urges Greater Global Role (Bloomberg)

Europe’s dominant country is stepping out from its own shadow. Seventy years after Germany’s defeat at the end of World War II, Chancellor Angela Merkel’s government is signaling a willingness to assume a bigger role in tackling the world’s crises without fear of offending allies like the U.S. Spurred into more international action by the refugee crisis, Merkel on Wednesday prodded Europe to adopt a “more active foreign policy” with greater efforts to end the civil war in Syria, the source of millions fleeing to safety. As well as enlisting the help of Russia, Turkey and Iran, Merkel said that will mean dialogue with Bashar al-Assad, making her the first major western leader to urge talks with the Syrian president.

Germany’s position as Europe’s biggest economy allowed Merkel and her finance minister, Wolfgang Schaeuble, to assume a leading role during the euro-area debt crisis centered on Greece, but the change in focus to beyond Europe’s borders is very much political. After decades of relying on industrial prowess – now under international scrutiny as a result of the Volkswagen scandal – globalization and the necessity to keep Europe relevant are opening up options for Merkel to make Germany a less reluctant hegemon. Syria has spurred “a rethink in German foreign policy,” Magdalena Kirchner at the German Council on Foreign Relations in Berlin, said. “As the refugee crisis developed, the view took hold that this conflict can no longer be fenced off or ignored. With her stance on the crisis, Merkel may be prodding other European leaders toward a bigger international engagement.”

Merkel will address the United Nations General Assembly in New York on Friday as she and key members of her cabinet begin to leverage Germany’s economic might and turn it into a force for global policy-making. Having been at the forefront of Ukraine peace talks, Merkel can also point to Germany’s part in forging a nuclear deal with Iran and efforts to spur the U.S. and others into action against climate change. “There is a rising awareness in the political class and even to some extent in the public that Germany has to assume more responsibility, especially in and around Europe,” said Kai-Olaf Lang, a senior fellow at the German Institute for International and Security Affairs in Berlin.

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How to put the Union in danger. Greece should adopt similar measures.

ECB Faces Defiance on Bank Oversight as Germany Hoards Power (Bloomberg)

vThe ECB faces increasing defiance from euro-area governments reluctant to cede control over their lenders, highlighted by a German bill that chips away at the ECB’s supervisory powers.vThe Bundestag, the lower house of parliament, votes Thursday on an amendment to Germany’s banking act that would allow the Finance Ministry in Berlin to issue rules on banks’ recovery plans, risk management and internal decisions under a bill implementing European Union rules for winding down failing banks.vThe Frankfurt-based ECB, which assumed supervisory powers over euro-area banks last November, is considering complaining at the European Commission, asking the EU’s executive arm to take Germany to court over the legislation.

“It will take a long time for euro-area member states to reach full acceptance that banking-sector policy is no longer in their hands,” said Nicolas Veron, a senior fellow at the Brussels-based Bruegel think tank. “National regulations, as in this German case, are essentially rearguard actions. But this kind of skirmish diverts” the ECB’s “attention from its important tasks of ensuring European banks are safe and sound.” Two weeks ago, German Finance Minister Wolfgang Schaeuble chided other countries in the bloc for putting the “cart before the horse” by pushing for a European deposit-guarantee system before they had fully implemented measures already on the books. At the same time, less than a year into the new era of centralized bank supervision in the euro area, Schaeuble’s ministry is chipping away at the authority of the ECB.

The central bank is trying to unify an array of national banking systems with strong historical roots, such as the savings and mutual banks in Germany and Austria. And Germany’s not alone in pushing back against the ECB. Fabio Panetta, Italy’s member of the ECB’s Supervisory Board, has warned that the central bank risks criticism for “unwarranted” and “arbitrary” decisions over higher capital requirements for euro-area lenders that could harm the fragile economy. One point of contention is “early intervention” rules enshrined in the EU’s Bank Recovery and Resolution Directive. The law gives supervisors the power to order capital increases, call shareholder meetings or oust managers in certain cases Yet triggers for early intervention vary widely in national laws implementing BRRD. The German rules are cast so narrowly that it’s practically impossible to use them unless a bank is already on the brink of collapse, negating the purpose of the law.

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Better do it well. Fire the right people, not scapegoats.

Volkswagen To Start Firings Over Emissions Scandal On Friday (Reuters)

Volkswagen will start firing people responsible for rigging U.S. emissions tests and shake up management on Friday, two sources familiar with the plans said, as the German carmaker tries to get to grips with the biggest scandal in its 78-year history. The supervisory board of Europe’s biggest automaker is meeting on Friday to decide a successor to chief executive Martin Winterkorn, who resigned on Wednesday. The sources said it would give initial findings from an internal investigation into who was responsible for programming some diesel cars to detect when they were being tested and alter the running of the engines to conceal their true emissions. Top managers could also be replaced, even if they did not know about the deception, with U.S. chief Michael Horn and group sales chief Christian Klingler seen as potentially vulnerable.

Volkswagen shares have plunged around 20% since U.S. regulators said on Friday the company could face up to $18 billion in penalties for falsifying emissions tests. The company said on Tuesday 11 million of its cars globally were fitted with engines that had shown a “noticeable deviation” in emission levels between testing and road use. Regulators in Europe and Asia have said they will also investigate, while Volkswagen faces criminal inquiries and lawsuits from cheated customers. When he resigned, Winterkorn denied he knew of any wrongdoing but said the company needed a fresh start. “There will be further personnel consequences in the next days and we are calling for those consequences,” Volkswagen board member Olaf Lies told the Bavarian broadcasting network, without elaborating.

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This will go global.

VW Faces Deluge Of UK Legal Claims (Guardian)

Volkswagen could face a barrage of legal claims from British car owners over the emissions tests scandal, according to top law firms. Lawyers say they have been indundated with enquiries from VW drivers whose cars may have been far more polluting than claimed, after the German carmaker admitted installing defeat devices to cheat tests. The CEO of Volkswagen, Martin Winterkorn, quit on Wednesday, with the group facing criminal investigation in the US and other countries, plus potential legal claims worldwide, with 11m vehicles directly affected. Leigh Day, a London law firm specialising in personal injury and product liability claims, says it has been “inundated” by inquiries; the number of potential claimants they were talking to would number “in the thousands – it’s constant enquirers at the moment.”

Another law firm, Slater & Gordon, said it was fielding calls from concerned drivers. The firm’s head of group litigation, Jacqueline Young, said both owners and car dealerships would have viable legal claims for breach of contract, with the value of vehicles falsely boosted by VW’s misrepresentations. Shareholders might also have a case, Young said, after the 30% fall in its share price since the scandal erupted. Young said a huge class-action lawsuit was possible: “If the Volkswagen scandal applies to cars in the UK then this has the potential to be one of the largest group action lawsuits this country has seen.” The German transport minister, Alexander Dobrindt, has now confirmed that Volkswagen vehicles containing software to fix emissions standards were also sold across Europe.

VW has put aside an initial €6.5bn to deal with the costs of the crisis, although that sum could be dwarfed by fines from US regulators. The carmaker has enlisted Kirkland & Ellis – the US law firm employed by BP in the Deepwater Horizon oil disaster – to deal with its mounting legal claims. Concerns over true pollution levels have also spread to fuel consumption, with consumer group Which? having long reported discrepancies between official miles per gallon test figures and their own results, with the VW Golf the second-worst offender in their research. Richard Lloyd, the Which? executive director, said: “Our research has consistently showed that the official test used by carmakers is seriously in need of updating as it contains a number of loopholes that lead to unrealistic performance claims.”

Pressure has grown on the UK government to follow up its call for a European commission inquiry, after it was revealed that the Department for Transport had been lobbying in private for less rigorous tests. Environmental law organisation ClientEarth has written to the DfT demanding it take action to establish whether VW’s use of defeat devices was part of wider industry practice, and to release all information held on the real-world emissions performance of cars licensed for sale on UK roads.

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The stats in the graph are devastating. Does anyone believe Germany or France will volunteer to break their car industries?

Europe Claims It Will Embrace Real-World Emissions Testing (WSJ)

For years, EU researchers have warned that diesel cars emit more nitrogen oxides, or NOx, than the regulations allow. A 2011 report said road tests of 12 diesel vehicles showed NOx levels exceeded European limits by as much as a factor of 14. A 2013 follow-up report by the same researchers said many modern cars used “defeat devices,” sensors or software that detects the start of an emissions test in a laboratory. The report suggested testing cars on the road, rather than in laboratories, was the best way of thwarting the use of such deviceswhich falsify results. Politicians are now calling for a review of testing protocols, while car makers attempt to calm the public by claiming their cars are as clean as advertised.

The EC, the EU’s executive arm, on Thursday asked governments to examine how many cars now on the road have software or sensors that can mask true emissions. “It is fundamental that the French authorities can guarantee…that the vehicles on the road in France respect the rules,” said Ségolène Royal, the French environment minister, Thursday after meeting with auto executives. French officials said they would form an independent commission to test around 100 cars and deliver results in a matter of weeks. The U.K. also said it would conduct random emissions tests on cars. The regulators will compare emissions from tests done in laboratories with those done in real-world situations, using relatively new portable testing equipment.

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Potentially explosive: “..it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.“

German Greens Claim Merkel Government Knew Emissions Tests Were Rigged (Ind.)

The German Green party has claimed that the German Government, led by Chancellor Angela Merkel, knew about the software car manufacturers used to rig emissions tests in the US. The Green party has said it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.” The Transport Ministry denied knowing that the software was being used in new vehicles, however. The timing of the questions has raised concerns over whether the German government knew about the activities at Volkswagen stretching back to 2009.

“The federal government admitted in July, to an inquiry from the Greens, that the [emissions] measurement practice had shortcomings. Nothing happened,” said Oliver Krischer, a German Green party lawmaker. Alexander Dobrindt, the German transport minister, has denied the government knew about emissions rigging. “I have made it very clear … that the allegations of the Greens party are false and inappropriate. We are trying to clear up this case. Volkswagen has to win back confidence,” he said. Governments and manufacturers are both aware that diesel vehicles emit up to five times the amount of poisonous nitrogen dioxide that they are limited to under law, but this is the first time a manufacturer has admitted to deceiving the authorities.

Note: in the graph, every other brand does worse than VW.

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Commodity economies.

Canadian Dollar Hits 11-Year Low And Just Keeps Falling (FinPo)

The Canadian dollar touched its weakest level in more than 11 years against the greenback on Wednesday and kept falling today, following July domestic retail sales figures that fell short of expectations and another plunge in volatile oil prices. New car and clothing sales helped push Canadian retail sales higher for the third month in a row in July, up 0.5% and in line with economists polled by Reuters, but sales were flat and below expectations when automotive figures were excluded. Volumes were also weaker than the headline, while figures from the previous month were revised lower.

“People had been thinking that we’d get a decent contribution to the next quarter’s GDP growth and show some positive data,” said Don Mikolich at CIBC World Markets, adding that the soft data also underscored the interest rate differential between Canada and the United States. “In a quiet week of data, that one sticks out as having a bit of a negative sentiment around the economy here. (Oil’s) the other big driver.” The loonie has plunged some 25% since last summer, along side the price of crude, a key Canadian export, but had been mostly rangebound over the last month after hitting a previous 11-year low at 75.18 U.S. cents. The price of crude, a key Canadian export, reversed course during the session to give up an earlier rally after large gasoline builds raised concerns about high autumn fuel supplies.

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More of the same.

Australia Pays the Price for Depending on China (Bloomberg)

Throughout Australia’s industrial heartland, factories are closing. About an eight-minute car ride from the center of Melbourne, a General Motors plant that in 1948 produced the first automobile wholly made in the country is scheduled to shut for good in 2017, victim of a rising Australian dollar that caused labor costs to nearly double from 2001 to 2011. Toyota and Ford factories are set to close within two years, leaving Australia without any domestic auto production. Down the road from the GM plant is a facility operated by Boeing. In 2010 it sold the plant’s equipment for making metal aircraft parts to Mahindra & Mahindra, an Indian company that’s shipping the machinery to Bengaluru. Last year, Alcoa closed a nearby aluminum smelter.

Until recently the sad decline of heavy industry had little impact on the country’s highflying economy. Australia’s factories were closing, but its mines were booming. Chinese demand for Australian iron ore and other resources kept the economy humming. The country hadn’t suffered through a recession since the early 1990s. The boom is over as the Chinese economy slows, and the woes of the manufacturing sector are complicating the job of new Prime Minister Malcolm Turnbull. Lawmakers from the right-of-center Liberal Party on Sept. 14 chose the former Goldman Sachs banker to be their new leader, ousting Prime Minister Tony Abbott amid concerns that Australia’s long run of economic growth was in danger. Gross domestic product in the second quarter expanded just 0.2% over the first quarter, worse than the 0.4% expected by economists.

The unemployment rate is at 6.2%, holding near a 13-year high. Turnbull, who was communications minister under Abbott, is promising action. “My government has a major focus on tax reform,” he told reporters on Sept. 20. That will mean less reliance on income taxes and more on consumer levies. An early investor in technology startups before entering politics, Turnbull in March co-authored an article in the Australian newspaper with Vivek Kundra, executive vice president of Salesforce.com and former chief information officer for President Obama. The pair lauded companies like Uber and Airbnb. “The most successful businesses in the 21st century will be those that embrace digital disruption as an opportunity, and not something to guard against,” they wrote.

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Behold: deflation at work.

Time To Dig Deep? Big Miners Face A Big Problem (Guardian)

How severe is the crisis in the world of over-borrowed big miners? Here’s an illustration. Anglo-American, a company founded in 1917, employing 148,000 people around the world and generating sales last year of almost £20bn, now has a stock market value of £8.7bn. By contrast, Next, the clothing chain with a £4bn turnover, is worth £11bn. Even Whitbread, pumping out Costa Coffees rather than digging for diamonds, coal and iron ore, is within a whisker of Anglo’s market value. Or try this one. Glencore, Ivan Glasenberg’s trading-cum-mining house, has seen its share price fall 20% since it raised £1.6bn last week to make its balance sheet “bullet proof”. Thursday’s closing price was 98.6p, versus a flotation price of 530p in 2011. Glencore is now worth just £14bn, even after consuming Xstrata in 2013 in a merger worth £55bn at the time.

Beleaguered mining executives speak despairingly of the deterioration in “market sentiment”, especially in the past fortnight. By that, they mean investors are terrified by every piece of weak economic data that emerges from China – the latest was a slowdown in manufacturing for the seventh consecutive month. The US Federal Reserve also spooked everybody by failing to raise interest rates last week; by fretting about “global economic and financial developments,” the Fed, in effect, invited others to do the same. If you are even slightly optimistic on China, you can find a parade of analysts arguing that mining shares are now cheap. The trouble is, many of the same voices were singing the same tune when Glencore and Anglo were at twice their current share prices earlier this year.

Predicting commodity prices – and thus miners’ cash-flows – is a mug’s game when nobody can really know the true state of affairs in China, the biggest customer. The only rough certainty is that most industrial commodities are over-supplied. But judging whether demand for copper, say, comes into balance in 2017, 2018 or 2019 is pure guesswork.

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Must. Restructure.

US Energy Lending Caught in a Squeeze (WSJ)

Banks are clashing with regulators over loan reviews that could crimp the flow of new credit to the oil patch. The dispute is focused on the relatively narrow issue of loans secured by oil and gas companies’ reserves, but it highlights the much broader point of how postcrisis regulation of the financial industry is affecting sectors far from Wall Street. On one side are the bankers who have been grappling with the plunge in oil prices and the need to shore up billions of dollars in credit extended to the energy industry. On the other are regulators eager to prevent another financial crisis while not knowing what it might be. Caught in the middle are the small- and medium-size exploration and production companies that rely on credit lines that use their energy reserves as collateral.

Banks are now beginning their fall reviews of the quality of that collateral and worry regulators could ding them for making loans the banks think are prudent. “We’re concerned about it,” said Matt McCaroll, CEO of Fieldwood Energy. “These are challenging times for our business…and to have additional pressure on the relationship between borrower and lender is going to be very problematic.” The oil and gas exploration company has about $1.75 billion of reserve-based loans with 23 banks. Mr. McCaroll said he has voiced his concerns with congressmen.

The issue came to a head this month when a dozen regulators from the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. flew to Houston to meet with about 40 energy bankers from J.P. Morgan, Wells Fargo, Bank of America, Citigroup and Royal Bank of Canada. In the spring and fall, regulators conduct a review of large corporate loans shared by multiple banks. Several industry officials said the meeting, held at Wells Fargo’s offices in downtown Houston, was the first of its kind. The bankers and regulators sat around tables in a large room with a screen displaying the OCC’s agenda that largely focused on examining and rating the loans.

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Desperation: “Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually..”

Oil Companies in Europe Seek Creative Funding as Lenders Retreat (Bloomberg)

Oil services companies in Europe are finding alternative ways to raise cash and repay debt after falling crude prices made it difficult for them to get funding from traditional sources. Dolphin Group AS has sought to persuade private-equity and hedge funds to finance projects exploring and mapping seabeds in return for interest tied to sales, according to people familiar with the matter. At least two Norwegian drillers are planning to sell and lease back ships to raise cash and fund operations as they struggle to access loan and bond markets, said the people, who asked not to be identified because the matters are private. Energy companies are being shut out of bond markets and lenders are reducing credit lines after prices dropped about 60% from last year’s peak.

Services companies in Europe are starting to run out of cash as producers from Shell to Petrobras cut their own investments and delay projects. “Bond markets are closed for these companies, especially small ones, and banks may not be lending to them at this stage,” said Nigel Thomas, partner at law firm Watson Farley & Williams in London. “Services companies need to buy time to survive during the downturn and alternative investors are able to give them that, albeit at a very expensive cost.” Bonds issued by oil-services businesses globally dropped to $6.7 billion this year, on pace for the least in a decade, according to data compiled by Bloomberg. French oilfield surveyor CGG said it had to cancel a loan in July because banks had offered unfavorable terms.

Energy-services companies are searching for new investors and funding strategies as even lenders of last resort pull back. Hedge funds and private-equity firms that previously sought to lend at high rates are becoming reluctant to step in after getting stuck with losing positions. Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually, people familiar with the matter said. The Bergen-based company is working with a potential lender for a deal that will pay interest linked to data sales, Chief Executive Officer Atle Jacobsen said this month. “We have never seen this type of funding in the industry before,” said Hakon Johansen at Fondsfinans in Oslo. “The market remains very weak, but Dolphin’s management wants to expand operations, hoping that someone in the end will buy their data.”

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Jan 052015
 
 January 5, 2015  Posted by at 1:06 pm Finance Tagged with: , , , , , ,  4 Responses »


Lewis Wickes Hine Child Labor in Magnolia Cotton Mills spinning room, Mississippi Mar 1911

Being Poor Is Getting Scarier in the US (Bloomberg)
The Euro In 2015: A Very Bad Start (CNBC)
Tsipras Says ECB Cannot Shut Greece Out Of Stimulus (Reuters)
Samaras Warns of Euro Exit Risk as Greek Campaign Starts (Bloomberg)
Worried About The UK In 2015? You’re Not Alone (CNBC)
The Credit Boom Is A Ticking Timebomb For UK Plc (Guardian)
Oil’s Future Hangs Between The Emirates And The Shales Of Eagle Ford (Observer)
Plunging Oil Prices Test Texas’ Economic Boom (WSJ)
From Boom To Bust In Australia’s Mining Towns (BBC)
The Bubble to End All Bubbles (Phoenix)
Russia’s ‘Startling’ Proposal To Europe: Dump The US, Join Us (Zero Hedge)
Knowing It Will End Badly And Turning A Blind Eye (Mark St.Cyr)
Czech President Condemns Kiev ‘Nazi Torchlight Parade’, EU’s Silence (RT)
France Seeks End To Russia Sanctions Over Ukraine (BBC)
‘More Russia Sanctions To Provoke ‘Dangerous Situation’ In Europe’ (RT)
North Korea/Sony Shows US Media Still Regurgitate Government Claims (Greenwald)
UK Ebola Patient Zero In Critical Condition (FT)
Scientists Target ‘Universal’ Protein To Treat Brain Cancer And Ebola (RT)
13 Species We Might Have To Say Goodbye To In 2015 (GlobalPost)
Earth’s Magnetic Field Now Flips More Often Than Ever (BBC)

“It’s hard to imagine how anyone can survive at 50% of the poverty level. As of 2013, that corresponded to $9,384 a year for a family of three. [..] more than 7 million people were living below it.

Being Poor Is Getting Scarier in the US (Bloomberg)

By any measure, the U.S. is among the wealthiest countries in the world. Judging from new research, though, it’s becoming an increasingly hazardous place to be poor. Every advanced nation has a mechanism to protect its most vulnerable members from economic shocks. In the U.S., government transfer programs such as unemployment insurance, food stamps and the earned income tax credit act to offset the impact of recessions, particularly for the poorest families. By putting much-needed money in the pockets of the people most likely to spend it, these “automatic stabilizers” also help the broader economy recover.

In a paper presented over the weekend at the annual meeting of the American Economic Association, economists Hilary Hoynes of the University of California at Berkeley and Marianne Bitler of UC Irvine explored how well automatic stabilizers in the U.S. are working. Using state-level data on unemployment rates and a measure of household income that accounts for taxes and transfers, they compared the effects of the most recent recession to those of the last deep recession in the 1980s. The result: The U.S. is doing a significantly worse job of protecting its most vulnerable households than it did a few decades ago.

Specifically, the economists estimate that during the 2008 recession, a one-percentage-point increase in the unemployment rate was associated with a nearly 10% increase in the share of 18- to 64-year-olds with household incomes of less than half the poverty level. That’s roughly double the effect of unemployment in the 1980s recession. It’s hard to imagine how anyone can survive at 50% of the poverty level. As of 2013, using the measure of income employed by Hoynes and Bitler, that corresponded to $9,384 a year for a family of three. Nonetheless, more than 7 million people were living below it. [..] Over the past three decades, economic output per person in the U.S. has increased more than 60%, to an estimated $54,678 in 2014. Surely such a rich country can afford to do better for the poor.

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Nothing left to prop it up.

The Euro In 2015: A Very Bad Start (CNBC)

The euro can’t seem to catch a break, starting 2015 with a drop to a nine-year low against the U.S. dollar as the timetable for central bank action appears to step up amid a storm of other negatives for the common currency. “The market was divided over when the ECB would undertake QE,” David Forrester, a foreign-exchange strategist at Macquarie, said. But comments from ECB President Mario Draghi changed that, he said, adding expectations are now for a policy adjustment possibly at the year’s first meeting on January 22. In an interview with German newspaper Handelsblatt, Draghi said he believes the risk that the central bank won’t be able to fulfill its mandate to preserve price stability had risen compared with six months ago. “It moves the timetable for QE potentially forward,” he said, but he noted that other factors are also weighing. “You also have U.S. dollar strength and the Fed potentially raising rates – that’s what’s feeding the euro weakness now.”

Weakness abounds, with the euro fetching $1.1936, after trading as low as $1.1860, its lowest since 2006. The ECB likely wants the euro to decline to help spur the economy and inflation, noted Jesper Bargmann, head of trading for Asia at Nordea. But he added, “I’m not sure they would like the euro to collapse in the short term.” Just how low could the euro fall? Willem Nabarro at Exane BNP Paribas, believes $1.1760 is the first target – the level where the common currency was first introduced, although he noted that consensus forecasts range from $1.10-$1.15. There are other ingredients likely spoiling the euro stew. For one, the euro’s attractiveness as a reserve currency appears to be slipping, with the IMF saying that the share of global central banks’ currency reserves held in the common currency was at 22.6% in the third quarter of last year, the lowest in a decade and off by more than a fullpercentage point from the previous quarter.

Another headwind: the price of oil has also started off the year with a run downward to fresh more than five year lows. U.S. crude futures extended declines to a third day on Monday, trading as low as $51.40 a barrel, while London Brent crude for February delivery fell as low as $55.36 a barrel, levels last seen in 2009. “In trying to anticipate the possible extent of further euro depreciation, it is worth remembering that inflation and inflation expectations lie at the crux of ECB policy initiatives,” Brian Martin, an economist at ANZ, said in a note Friday. “The trend in EUR/USD has been closely correlated with the trend in the oil price and is likely to remain so for the foreseeable future.”

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Let’s see Draghi address this issue. Or Merkel.

Tsipras Says ECB Cannot Shut Greece Out Of Stimulus (Reuters)

Greek leftwing opposition leader Alexis Tsipras said the European Central Bank (ECB) could not exclude Greece if it decides to move to a full «quantitative easing» programme to stimulate the euro zone’s faltering economy. Speaking at a party congress on Saturday, three weeks before a Jan. 25 general election, Tsipras also said his Syriza party would ensure much of Greece’s debt was written off as part of a renegotiation of its international bailout deal. The election takes place three days after a Jan. 22 policy meeting at which the ECB may decide to proceed with a quantitative easing (QE) programme to pump billions of euros into the euro zone economy by buying government bonds.

Tsipras said he hoped ECB President Mario Draghi would decide to go ahead with the programme and said Greece could not be shut out, as some economists and politicians from countries including Germany have suggested. “Quantitative easing by the ECB with direct purchases of government bonds must include Greece,» Tsipras said. The comments underline the pressures facing Draghi ahead of the decision, with many in Germany opposed to full-scale QE which they fear will create asset bubbles and remove incentives for reform-shy governments to act. Syriza, which holds a slim opinion poll lead over Prime Minister Antonis Samaras’ centre-right New Democracy party, has moderated its tone in recent months, pledging to keep Greece in the euro and not to unilaterally repudiate the bailout deal.

But the prospect of a Syriza-led government has set financial markets on edge and caused alarm in Germany, where a succession of politicians and economists have argued the euro zone could cope with Greece’s exit. In a speech laced with barbs against German Chancellor Angela Merkel and finance minister Wolfgang Schaeuble, Tsipras said his party would roll back many of the austerity policies imposed by the bailout «troika». “Austerity is both irrational and destructive. To pay back debt, a bold restructuring is needed,» he said. Repeating many policy pledges first laid out last year, he promised to do away with a real estate tax, freeze house foreclosures, raise the minimum wage and reinstate a €12,000 ($14,400) tax-free threshold to help low earners. He said he would abandon the goal of achieving primary budget surpluses, aimed at cutting Greece’s debt burden equivalent to more than 175% of gross domestic product. But he pledged to protect bank deposits and ensure public finances remain on a sound footing.

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Greece needs to fight its corruption, and that won’t happen under Samaras.

Samaras Warns of Euro Exit Risk as Greek Campaign Starts (Bloomberg)

Greece’s political parties embarked on a flash campaign for elections in less than three weeks that Prime Minister Antonis Samaras said it will determine the fate of the country’s membership in the euro currency area. Samaras used a Jan. 2 speech to warn that victory for the main opposition Syriza party would cause default and Greece’s exit from the 19-member euro region, while Syriza leader Alexis Tsipras said his party would end German-led austerity. Der Spiegel magazine reported Chancellor Angela Merkel is ready to accept a Greek exit, a development Berlin sees as inevitable and manageable if Syriza wins, as polls suggest. The high-stakes run-up to the Jan. 25 vote returns Greece to the center of European policy makers’ attention as they strive to fend off a return of the debt crisis that wracked the region from late 2009, forcing international financial support for five EU countries.

While Greek 10-year bond yields rose to about 9% last week from a post-crisis low of 5.57% in September, the relative improvement in yields from Italy to Ireland suggests that the contagion has been contained. “Many European officials believe a Greek exit would be manageable, and in contrast to 2010-2011, we wouldn’t see the same cascading effect on countries like Spain or Ireland,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by telephone. Tsipras, in a speech on Jan. 3, vowed to restructure his nation’s debt and end what he called the “unreasonable and catastrophic” austerity policies. Greece will “write down on most of the nominal value of debt, so that it becomes sustainable,” Tsipras said, according to the e-mailed transcript of a speech in Athens. “That’s what was done for Germany in 1953, it should be done for Greece in 2015.”

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EU referendum pushed forward.

Worried About The UK In 2015? You’re Not Alone (CNBC)

The shadow of a general election and a possible exit from the European Union are already making investors nervous about the UK in 2015. On Monday, traditionally the first back-to-work day of the New Year, sterling fell slightly against the dollar and the FTSE was flat, as traders warily eyed the UK. The new year also saw all of the main parties launch their campaigns for May’s general election and for what many pundits predict will be the most unpredictable poll in living memory. “The traditional metrics in how the poll will turn out are being thrown out of the window,” Jeremy Stretch, head of currency strategy at CIBC, told CNBC. He argued that sterling is likely to come under continued pressure ahead of the elections. “All of a sudden, investors are saying they want to look back and see how the smoke clears before committing to the UK”

While the left-leaning Labour Party is leading most recent polls, it looks increasingly likely that either it or the Conservative Party may have to enter a coalition with one or more of the smaller parties to ensure a majority. Another option is that one of the parties governs in what is known as a “hung parliament”, where it doesn’t have a majority and is reliant on the support of other parties to pass laws. Either of these options may lead to the Liberal Democrats party, which got the third-biggest share of the vote in the last election, or minority parties like the Scottish National Party, the U.K. Independence Party (UKIP) or Northern Ireland’s Democratic Unionist Party (DUP) holding the key to running of the country.

The other cloud hanging over investors is whether the UK chooses to stay in the European Union or not. Back in 2013 Prime Minister David Cameron, under pressure from euro-skeptic members of his own party and the increasingly popular UKIP, promised to hold a referendum on the UK’s membership of the EU, which is seen as meddlesome, bureaucratic and expensive by a large number of voters. In an interview with the BBC, Cameron said Sunday that, if his party is in power after the next election, a referendum on the U.K.’s EU membership may come earlier than 2017, the year previously promised. Ministers who are against the U.K.’s continued membership of the trading bloc will have to step aside from their posts if they want to campaign for a “no” vote, he announced.

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A divide between rich and poor, as well as one between old and young.

The Credit Boom Is A Ticking Timebomb For UK Plc (Guardian)

There is a warning buried in the economic figures that appeared last week. While most of the focus was on the steady decline in house buying and numbers showing Britain’s national income grew more slowly last year than previously estimated; the latest borrowing figures set alarm bells ringing. Consumer credit figures from the Bank of England revealed Britons ended the year slapping their credit cards on shop counters as if the financial crisis was a distant memory. Borrowing on credit cards and unsecured loans grew in November at its strongest pace since 2008. We knew that retail sales had surged that month and now we knew why. Mortgage borrowing added to the credit boom, piling another £2.1bn on the debt mountain in November.

The increase was higher than expected and came despite a fall in the number of mortgage approvals. At the same time the central bank was publishing its credit figures, a survey of factory managers could only be described as depressing. Yet again, just as the sector appeared to be finally recovering from the great crash, the momentum has tailed off. The survey of manufacturers found expansion eased back in December after picking up in October and November. And that little period of early winter joy was shortlived, coming after a September that represented a 17-month low. Output and new orders growth moderated in December, and most importantly exports remained lacklustre.

Those economists who found reasons to be cheerful from the figures suggested that the UK’s strong domestic demand would keep the sector growing. The same economists look at the borrowing figures and discern a more benign outlook from the total UK household debt burden, which is continuing a trend since the crash and still coming down. What was once a household debt to income ratio of 175% is now nearer 130%. Yet the overall figure depends on the over-50s paying off their mortgages at an accelerated rate. By contrast, the under-40s take on bigger mortgages to buy a home with an inflated price and borrow on credit cards to fund a lifestyle ravaged by six years of below inflation pay rises.

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No, it really is a race to the bottom.

Oil’s Future Hangs Between The Emirates And The Shales Of Eagle Ford (Observer)

The decision by president Barack Obama to open the door to US oil exports seeped out of Washington in a low-key manner last week, but the impact could be as explosive as a New Year’s Eve firework display. The ban – imposed after the Middle East oil embargoes in the 1970s – has made it close to impossible to ship abroad the fruits of America’s shale bonanza. It also long looked wrong-headed in the home of free trade. The US department of commerce quietly overturned the four-decade-old policy by saying it had started to approve a backlog of requests to sell processed light oil to foreign buyers. The issue is tremendously sensitive, which is possibly why the announcement came out at a time of year when most policymakers were still at home enjoying the Christmas holidays with their families.

Many manufacturers and many domestic consumers are totally opposed to domestic oil or gas production being exported, on the grounds that it could bring an end to cheaper local energy supplies and competitive advantages. But prospectors from the shales in Eagle Ford, Texas and Marcellus, Pennsylvania have been campaigning in Washington for a change in the law for some time, their calls growing more urgent now that some face potential financial trouble as the price of oil plunges from $115 per barrel down to $56. Meanwhile American oil sometimes sells at $15 per barrel less on the local market as supply exceeds demand: not good for the frackers already burdened by their relatively high-cost operations.

But by opening the door to exports – of slightly refined products – Washington has struck a more serious blow to its export rivals in Saudi Arabia, Russia and elsewhere. Ed Morse, global head of commodities research at Citigroup bank, had no trouble predicting that the move would “open up the floodgates to substantial increases in [US] exports by end 2015”.

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Bubble.

Plunging Oil Prices Test Texas’ Economic Boom (WSJ)

Retired Southwest Airlines co-founder Herb Kelleher remembers a Texas bumper sticker from the late 1980s, when falling energy prices triggered an ugly regional downturn: “Dear Lord, give me another boom and I promise I won’t screw it up.” Texas got its wish with another energy-driven boom, and now plunging oil prices are testing whether the state has held up its end of the bargain. The Lone Star State’s economy has been a national growth engine since the recession ended, expanding at a rate of 4.4% annually between 2009 and 2013, twice the pace of the U.S. as a whole. The downturn in energy prices now has triggered a debate over whether Texas simply got lucky in recent years, thanks to a hydraulic-fracturing oil-and-gas boom, or whether it hit on an economic playbook that other states, and the country as a whole, could emulate.

One in seven jobs created nationally during the 50-month expansion has been created in Texas, where the unemployment rate, at 4.9%, is nearly a percentage point lower than the national average. But a big dose of the state’s good fortune comes from the oil-and-gas sector. Midland, which sits atop the oil-rich Permian Basin, had the fastest weekly wage growth in the country among large counties: 9% in the 12 months ending June 2014. Now that oil prices have plunged nearly 51% from their June peak to $52.69 a barrel, some Texans sobered by memories of past energy busts are bracing for a fall. The argument among economists and business leaders isn’t whether the state will be hurt, but how badly.

Mr. Kelleher is among the Texans predicting this won’t be a replay of the 1980s oil bust and banking crisis, which drove the state unemployment rate to 9.3%. As evidence, he and others cite a more cautious banking sector, a tax and regulatory environment favorable to business, and a state economy less dependent on energy and other resources. “Texas has become a well-rounded state,” Mr. Kelleher said. “People did remember not to overextend themselves.”

Michael Feroli, a New York-based economist at J.P. Morgan Chase & Co., is one of the skeptics of the “this-time-is-different” camp. Although the oil-and-gas industry today makes up a smaller share of Texas’ workforce than it did in the mid-1980s, it accounts for roughly the same share of its economic output, he said. So a decline in oil prices similar to the plunge of more than 50% seen in the mid-1980s, he said, could have a similar result: recession. “Texas is, if oil prices stay where they are, going to face a more difficult economic reality,” Mr. Feroli said.

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Another bubble.

From Boom To Bust In Australia’s Mining Towns (BBC)

After 23 years of growth, including one of the biggest mining booms in the nation’s history, tumbling iron ore and coal prices have put a brake on Australia’s economy – and mining towns are paying the price. Peter Windle is a casualty of the mining slowdown. The New South Wales mining employee has lost a well-paid job, a company car and an annual bonus that in some years was as high as A$60,000 ($48,800; £31,300). A termination package from the mining company he used to work for has helped soften the blow. But Mr Windle still had to sell his investment property to keep his head above water. Once part of a vast army of workers in what was Australia’s booming resources sector, Mr Windle now gets up at 5.30 am five days a week to clean and drive school buses in the small town of Muswellbrook.

For decades, the town had ridden the waves of Australia’s coal boom. “It’s the worst I’ve seen it in 28 years in the mining industry,” says Mr Windle. “Everyone is getting out. Three hundred houses are for sale in my town, three in my street, and rental prices have collapsed on older weatherboard houses from A$1,000 a week to A$200,” he says. Mr Windle was the purchase and compliance manager at Glennies Creek Coal Mine. Earlier this year, however, Brazilian company Vale – which owns the underground mine and an open-cut mine at nearby Camberwell – suddenly announced it was sacking 500 workers and mothballing the mines. Mr Windle’s story is not unusual. Across Australia, coal and iron ore mines are laying off staff, shutting down operations or putting new investments on hold.

Resource analysts say it is the end of a long and lucrative mining boom that was mostly fuelled by demand from China. The number of people employed in coal mining alone rose from 15,000 to 60,000 between 2001 and 2014, according to the Australian Bureau of Statistics. Mining companies offered high wages to entice workers from other industries, and to mines that were often in remote locations such as outback Western Australia. Preliminary estimates suggest that this year, Australia exported over A$40bn of coal, much of it to China. But as China’s economy has slowed, the price of coal used for power generation has fallen, from US$142 a tonne in January 2011 to US$67 a tonne in November 2014, according to the World Bank. In the case of iron ore, in mid-December it was trading at about US$70 a tonne, the lowest level since 2009.

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And The Bubble to End All Bubbles.

The Bubble to End All Bubbles (Phoenix)

If your job is to sit in front of a camera selling the notion of getting rich from investing, you’re not going to talk about bonds or currencies (maybe the latter is of interest but only with insane amounts of leverage which usually bankrupts a trader in his or her first trade). However, today stocks are in fact a very minor story. They are, in a sense, the investing equivalent of picking up pennies in front of a steamroller. That steamroller is the $100 trillion bond bubble. For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes. This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. This is compounded by the fact that the political process largely consists of promising various social spending programs/ entitlements to incentivize voters.

This type of social spending is not temporary… this is endemic. The US is not alone… Most major Western nations are completely bankrupt due to excessive social spending. And ALL of this spending has been fueled by bonds. This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense. 1) Central banks cut interest rates to make these gargantuan debts more serviceable. 2) Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring. 3) Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was an economic positive) because it would burst the bond bubble and bankrupt sovereign nations.

The bond bubble, like all bubbles, will burst. When it does, everything about investing will change. Bonds have been in bull market since the early ‘80s. Thus, an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper. This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital. Today, that leverage has resulted in $100 trillion in bonds with over $555 trillion in derivatives based on bonds. This bubble, literally dwarfs all other bubbles. To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion). When this bubble bursts, 2008 will look like a picnic.

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Makes sense.

Russia’s ‘Startling’ Proposal To Europe: Dump The US, Join Us (Zero Hedge)

Slowly but surely Europe is figuring out that as a result of the western economic and financial blockade of Russian, it is Europe itself that is suffering the most. And while Germany was first to acknowledge this late in 2014 when its economy swooned and is now on the verge of a recession, now others are catching on. Case in point: the former head of the European Commission, and Italy’s former Prime Minister, Romano Prodi who told Messaggero newspaper that the “weaker Russian economy is extremely unprofitable for Italy.” The other details from Prodi’s statement:

Lowered prices in the international energy markets have positive aspects for the Italian consumers, who pay less for the fuel, but the effect will be only short-term. In the long-term however the weaker economic situation in countries producing energy resources, caused by lower oil and gas prices, mostly in Russia, is extremely unprofitable for Italy, he said. “The lowering of the oil and gas prices in combination with the sanctions, pushed by the Ukrainian crisis, will drop the Russian GPD by five% per annum, and thus it will cause cutting of the Italian export by about 50%,” Prodi said. “Setting aside the uselessness or imminence of the sanctions, one should highlight a clear skew: regardless of the rouble rate against dollar, which is lower by almost a half, the American export to Russia is growing, while the export from Europe is shrinking.”

In other words, just as slowly, the world is starting to grasp the bottom line: it is not the financial exposure to Russia, or the threat of financial contagion should Russia suffer a major recession or worse: it is something far simpler that will lead to the biggest harm for Europe’s countries. The lack of trade. Because while central banks can monetize everything, leading to an unprecedented asset bubble which if only for the time being boosts investor and consumer confidence, they can’t print trade – that all important driver of growth in a globalized world long before central banks were set to monetize over $1 trillion in bonds each and every year to mask the fact that the world is deep in a global depression.

Which is why we read the following report written in yesterday’s Deutsche Wirtschafts Nachrichten with great interest because it goes right to the bottom line. In it Russia has a not so modest proposal to Europe: dump trade with the US, whose call for Russian “costs” has cost you another year of declining economic growth, and instead join the Eurasian Economic Union! From the source:

Russia has presented a startling proposal to overcome the tensions with the EU: The EU should renounce the free trade agreement with the United States TTIP and enter into a partnership with the newly established Eurasian Economic Union instead. A free trade zone with the neighbors would make more sense than a deal with the US.

It surely would, but then how will Europe feign outrage when the NSA is found to have spied yet again on its “closest trading partners?”

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Funny. St. Cyr writes exactly what I did last November in Making Money While The World Burns and Hugh Hendry And The Deflationary Zeitgeist.

Knowing It Will End Badly And Turning A Blind Eye (Mark St.Cyr)

As 2014 came to an end I like many of you probably felt a brief sigh of relief that maybe, just maybe, we could move into 2015 with a little more sanity shoved back into the financial markets. Now with QE as a know certain (at least for this moment) that indeed the spigot to the fire-hose has been shut off albeit there is still the “reinvestment” sprinkler system still at play. We might possibly get back to a little bit of sanity within the capital markets. I watched a great many pundits take to both the financial air-wave cameras, as well as radio and print with fervent breath to make more or less a blanket statement that all the so-called “doom crew” (this is what you are now branded if you dare make a cogent case against fairy-tales and pixie-dust) were proven to be, without a doubt – totally wrong.

Added to this near foamed mouthed expression of glee was the added generalized diatribe, “when will these people just admit they were wrong and go away?!” Every time I heard or read a statement reminiscent of this I burst out into laughter. Until I read Hugh Hendry’s Eclectica Fund’s “Letter to Investors.” Here is where I went from laughter – to outright stupefaction. Before I go any further let me make this point clear: I am, and have been a fan of Mr. Hendry’s investing prowess, his willingness to point out in public whether an Emperor is clothed or not, and more. However, I have also made my opinion clear about my uneasiness when he originally turned his investing thesis onto its head and became by his own words “a Bull.”

Although I understood the thesis I believed (and still do) that there is an inherent danger when this view is accepted and codified based on this market. So strongly do I feel about this I suggest we turn the danger scale up more towards perilous. Or, in simple terms – the danger knob has just been turned to 11 in my view after reading his latest letter. The opening paragraph was nearly all one had to read as to know both the direction and the stance that seems now fully embraced by more than just Mr, Hendry – but everyone currently on this Keynesian fueled bandwagon. To wit:

“There are times when an investor has no choice but to behave as though he believes in things that don’t necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often.”

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“The Czech President said something is “wrong” not only with Ukraine, but also with the European Union, which did not protest or condemn this action.”

Czech President Condemns Kiev ‘Nazi Torchlight Parade’, EU’s Silence (RT)

The chilling slogans and a flagrant demonstration of nationalist symbols during the neo-Nazi march in Kiev reminded the Czech President Milos Zeman of Hitler’s Germany. He said something was “wrong” both with Ukraine and the EU which didn’t condemn it. Zeman was commenting on the appalling scenes, which showed thousands of Ukrainian nationalists holding a torchlight procession across the Ukrainian capital on Thursday to commemorate the 106th birthday of Stepan Bandera, a Nazi collaborator and the Ukraine nationalist movement’s leader during World War II. “There is something wrong with Ukraine,” the Czech Republic’s leadertold radio F1 on Sunday. “Yesterday evening I was browsing the Internet and discovered a video showing the demonstration on Kiev’s Maidan on January 1.”

“These demonstrators carried portraits of Stepan Bandera, which reminded me of Reinhard Heydrich,” Zeman said referring to one of the main architects of the Holocaust and at the time a Reich-Protector of Czech Republic’s territories. The parade itself was organized similar to Nazi torchlight parades, where participants shouted the slogan: ‘Death to the Poles, Jews and communists without mercy,”Zeman explained. Bandera was the head of the Organization of Ukrainian Nationalists (OUN), which collaborated with Nazi Germany, and was involved in the ethnic cleansing of Poles, Jews and Russians. “Glory to the nation! Death to enemies!”, “Ukraine belongs to Ukrainians” and “Bandera will return and restore order”, were the repeated slogans during the neo-Nazi march. Some of the participants wore World War II Bandera’s insurgent army uniforms while others paraded with red and black nationalist flags.

The Czech President said something is “wrong” not only with Ukraine, but also with the European Union, which did not protest or condemn this action. “Don’t forget that Bandera is considered a national hero in Ukraine, his image is hanging in the Maidan, his statue is in Lvov. In reality, he was a mass murderer,” Zeman said last summer on Czech Television. Russia too has on numerous occasions condemned the resurgence of neo-Nazi traditions in Ukraine and considers such displays of militant nationalism as means to fabricate history. “Torch-lit marches in Ukraine demonstrate that it is continuing to move along the path of the Nazis!” Konstantin Dolgov, the foreign ministry’s human rights envoy, said last week. “And this is in the center of civilized Europe!”

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They need to throw out Yats and the other US agents.

France Seeks End To Russia Sanctions Over Ukraine (BBC)

French President Francois Hollande says he wants Western sanctions on Russia to be lifted if progress is made in talks on the Ukraine conflict this month. He did not specify which sanctions – imposed by the EU, US and Canada – could be lifted. The sanctions began after Russia annexed Crimea in March. Mr Hollande said Russian President Vladimir Putin “doesn’t want to annex eastern Ukraine – he told me that”. Germany’s vice-chancellor has warned against further sanctions on Russia. Sigmar Gabriel – a centre-left politician like Mr Hollande – said the sanctions were aimed at making Russia negotiate to resolve the Ukraine conflict. But some “forces” in Europe and the US wanted sanctions to cripple Russia, which would “risk a conflagration”. “We want to help get the Ukraine conflict resolved, but not to push Russia onto its knees,” he told Bild am Sonntag newspaper.

The OSCE security organisation has reported sporadic shelling between Ukrainian forces and pro-Russian separatists in eastern Ukraine despite a ceasefire agreement. In late December several hundred prisoners were exchanged. There have been calls elsewhere in the EU for an easing or lifting of the sanctions on Russia, which have hit Russia’s banks, energy industry and arms manufacturers, as well as targeting powerful figures close to Mr Putin. Politicians in Italy, Hungary and Slovakia are among those who want the sanctions eased. “The sanctions must be lifted if there is progress. If there is no progress the sanctions will stay in place,” Mr Hollande told France Inter radio. He confirmed that a France-Germany-Russia-Ukraine summit would be held in Astana, Kazakhstan, on 15 January, focusing on the Ukraine conflict.

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“.. additional sanctions may exclude Moscow from partnership in the resolution of conflicts which “will have very dangerous consequences for the entire world.”

‘More Russia Sanctions To Provoke ‘Dangerous Situation’ In Europe’ (RT)

Tougher sanctions against Russia could destabilize the country and provoke an “even more dangerous” situation in Europe and have negative consequences for the entire world, German Vice-Chancellor Economic Affairs and Energy Minister has warned. “Those who want it, provoke an even more dangerous situation for all of us in Europe,” Sigmar Gabriel said in an interview with the Bild am Sonntag newspaper on Sunday. “Those who are seeking to even more destabilize Russia from the economic and political point of view are pursuing quite different goals.” The goal of sanctions against Russia was to return Moscow to the negotiating table to find ways for a peaceful resolution to the crisis in Ukraine, he said. He elaborated that additional sanctions may exclude Moscow from partnership in the resolution of conflicts which “will have very dangerous consequences for the entire world.”

Though there are some in the US and EU that “would like to floor their superpower rival,” but it is not in the interest of Germany or Europe, he stated. “We want to help solve the conflict in Ukraine, not to force Russia to its knees,” he stressed. The US and EU slapped Russia with several rounds of sanctions, starting in March after Crimea joined Russia. Western nations have accused Russia of annexing Crimea, though Moscow has denied the claims stressing that residents of the peninsula voted in favor of the notion in a referendum that was in line with the international law and the UN Charter. The first round of Western sanctions targeted Russian officials and companies and included visa bans and asset freezes. The second round of sanctions that put pressure on financial, energy, and defense sectors was announced in July with the US and EU blaming Moscow for involvement in the unrest in eastern Ukraine.

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Amen.

North Korea/Sony Shows US Media Still Regurgitate Government Claims (Greenwald)

This government-subservient reporting was not universal; there were some noble exceptions. On the day of Obama’s press conference, MSNBC’s Rachel Maddow hosted Xeni Jardin in a segment which repeatedly questioned the evidence of North Korea’s involvement. The network’s Chris Hayes early on did the same. The Guardian published a video interview with a cyber expert casting doubt on the government’s case. The Daily Beast published an article by Rogers expressly arguing that “all the evidence leads me to believe that the great Sony Pictures hack of 2014 is far more likely to be the work of one disgruntled employee facing a pink slip.” He concluded: “I am no fan of the North Korean regime. However I believe that calling out a foreign nation over a cybercrime of this magnitude should never have been undertaken on such weak evidence.”

Earlier this week, the NYT‘s Public Editor, Margaret Sullivan, chided the paper’s original article on the Sony hack, noting – with understatement – that “there’s little skepticism in this article.” Sullivan added that the paper’s granting of anonymity to administration officials to make the accusation yet again violated the paper’s own supposed policy on anonymity, a policy touted by the paper as a redress for the debacle over its laundering of false claims about Iraqi WMDs from anonymous officials. But – especially after that first NYT article, and even more so after Obama’s press conference – the overwhelming narrative disseminated by the U.S. media was clear: North Korea was responsible for the hack, because the government said it was.That kind of reflexive embrace of government claims is journalistically inexcusable in all cases, for reasons that should be self-evident. But in this case, it’s truly dangerous.

It was predictable in the extreme that – even beyond the familiar neocon war-lovers – the accusation against North Korea would be exploited to justify yet more acts of U.S. aggression. In one typical example, the Boston Globe quoted George Mason University School of Law assistant dean Richard Kelsey calling the cyber-attack an “act of war,” one “requiring an aggressive response from the United States.” He added: “This is a new battlefield, and the North Koreans have just fired the first flare.” The paper’s own writer, Hiawatha Bray, explained that “hackers allegedly backed by the impoverished, backward nation of North Korea have terrorized one of the world’s richest corporation” and approvingly cited Newt Gingrich as saying: “With the Sony collapse America has lost its first cyberwar.”

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“.. the hospital was unable to obtain ZMapp, the drug used to treat fellow British volunteer nurse William Pooley, because “there is none in the world at the moment ..”

UK Ebola Patient Zero In Critical Condition (FT)

The condition of Pauline Cafferkey, a Scottish nurse who this week became the first person to be diagnosed with Ebola on UK soil, has deteriorated and is now critical, the Royal Free Hospital said on Saturday, as it emerged that another patient had tested negative for the deadly virus at a hospital in Swindon The 39-year-old’s sudden change in condition comes after her doctor described her as sitting up, eating, drinking and communicating with her family on New Year’s Day. Michael Jacobs, one of the medics treating her, warned that she faced a “critical” few days while she was treated with the blood from a survivor and an experimental antiviral drug which is “not proven to work.” Great Western Hospitals NHS Foundation Trust said on Sunday that an individual with a history of travel to west Africa had tested negative for Ebola but remained under observation at the hospital.

“The test results have come back negative. The patient is continuing to stay within the hospital for treatment,” the trust said. Ms Cafferkey was initially admitted to a hospital in Glasgow, the city in which she works as part of a public health team, after she returned from west Africa having flown via Morocco to London’s Heathrow airport. As her condition worsened she was transferred to an isolation unit at the Royal Free Hospital in Hampstead, north London. However, the hospital was unable to obtain ZMapp, the drug used to treat fellow British volunteer nurse William Pooley, because “there is none in the world at the moment,” Dr Jacobs said. Mr Pooley, who was also treated at the Royal Free, made a full recovery and has since returned to Sierra Leone to continue treating those affected by the virus.

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Too good to be true?

Scientists Target ‘Universal’ Protein To Treat Brain Cancer And Ebola (RT)

US researchers have identified a protein, which they believe is a universal therapeutic target for treating a number of deadly human diseases. They used a drug combination which included Viagra to effectively target the protein. Researchers at Virginia Commonwealth University (VCU) have figured out a protein – GRP78 – that may be a possible target to rid humans of such viral and bacterial infections as Ebola, Influenza and Hepatitis, as well as be a way to cure brain cancer. The pre-clinical study which was led by the US University, and published in the Journal of Cellular Physiology, used a drug combination – with Viagra being one of its elements – to target GRP78 and related proteins. As a result, researchers managed to prevent replication of a variety of major viruses in infected cells, and made some antibiotic-resistant bacteria vulnerable to common antibiotics. Evidence that brain cancer stem cells were killed was also found.

“Basically, we’ve got a concept that by attacking GRP78 and related proteins: (a) we hurt cancer cells; (b) we inhibit the ability of viruses to infect and to reproduce; and (c) we are able to kill superbug antibiotic-resistant bacteria,” said the study’s lead investigator, Paul Dent. After studying the effect in cancer cells, the researchers applied the same drug combination to target the protein for infectious diseases. Viral receptor expression on the surface of target cells was reduced, which decreased infectivity, and replication of a virus in infected cells was also prevented. By proving GRP78 to be a “drugable” target, researchers say the findings open new possibilities in treating various viral infections – “that certainly most people would say we’ll never be able to treat.” According to Dent, scientists already know that in mice the same Viagra treatment can kill tumor cells without harming other tissues, and the next steps in further discovering the possibilities of the method have already been taken.

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How to make me sad on a Monday morning.

13 Species We Might Have To Say Goodbye To In 2015 (GlobalPost)

British broadcaster and naturalist Sir David Attenborough once asked: “Are we happy to suppose that our grandchildren may never be able to see an elephant except in a picture book?” This year marked the 100th anniversary of the death of the last passenger pigeon, Martha, who managed to survive only 14 years in captivity after her species became extinct in the wild. More recently, Angalifu, a 44-year-old northern white rhinoceros, died at the San Diego Zoo, leaving just five other white rhinos worldwide, all in captivity. Chances are our grandchildren will never get to see this remarkable creature. In fact, the world is losing dozens of species every day in what experts are calling the sixth mass extinction in Earth’s history.

As many as 30 to 50% of all species are moving toward extinction by mid-century – and the blame sits squarely on our shoulders. “Habitat destruction, pollution or overfishing either kills off wild creatures and plants or leaves them badly weakened,” said Derek Tittensor, a marine ecologist at the World Conservation Monitoring Centre in Cambridge. “The trouble is that in coming decades, the additional threat of worsening climate change will become more and more pronounced and could then kill off these survivors.” About 190 nations met last month at the United Nations climate talks in Lima, Peru to discuss action needed to curb rising greenhouse gas emissions. It ended with a watered-down agreement that seems unlikely to help much in the battle against global warming.

Corruption and illegal online trafficking also threaten conservation efforts. The illegal wildlife trade is an estimated $10-billion-a-year industry. It’s the fifth largest contraband trade after narcotics, fueled by the rising demand for animals as pets, trophies, and ingredients in medicine, food and other products. There’s no doubt that we’re facing an uphill battle against mankind’s unsustainable greed and consumption, but it’s a battle we can’t afford to lose. “The thought of having to explain to my children that there were once tigers — real, wild tigers, out there, in the great forests of the world – but that we let them die out, because we were busy – well, it was bad enough explaining about the Tooth Fairy, and that wasn’t even my fault,” said English comedian Simon Evans.

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Yikes!

Earth’s Magnetic Field Now Flips More Often Than Ever (BBC)

The Earth’s magnetic field, which protects us from potentially dangerous solar radiation, is gradually losing its stability. No need to move underground or build space colonies just yet, though: the changes are taking place over millions of years. You might assume that compasses will always point north, but in fact the magnetic poles have swapped places many times in the Earth’s history. Earth scientists have long suspected that these flips are becoming more frequent, and that the magnetic field was less prone to pole reversals in the distant past. Now the most detailed analysis of the geological evidence to date suggests that the field really is slowly destabilising. Whereas in the distant past it reversed direction every 5 million years, it now does so every 200,000 years.

Earth’s magnetic field is powered by the heart of the planet. At its centre is a solid inner core surrounded by a fluid outer core, which is hotter at the bottom. Hot iron rises within the outer core, then cools and sinks. These convection currents, combined with the rotation of the Earth, are thought to generate a “geodynamo” that powers the magnetic field. Because of changing temperatures and fluid flows, the strength of the magnetic field varies, and the positions of the north and south magnetic poles shift. These shifts leave traces in rocks. When lava cools, metal oxide particles within the rock become frozen in the direction of the prevailing magnetic field. So scientists can work out the historic positions of the magnetic poles by examining and dating lava samples. As a result we know there have been about 170 magnetic pole reversals during the last 100 million years, and that the last major reversal was 781,000 years ago.

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