May 182017
 
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Pablo Picasso Bull plates I-XI 1945

 

Nicole Foss has completed a huge tour de force with her update of the Automatic Earth Primer Guide. The first update since 2013 is now more like a Primer Library, with close to 160 articles and videos published over the past -almost- 10 years, and Nicole’s words to guide you through it. Here’s Nicole:

 

 

The Automatic Earth (TAE) has existed for almost ten years now. That is nearly ten years of exploring and describing the biggest possible big picture of our present predicament. The intention of this post is to gather all of our most fundamental articles in one place, so that readers can access our worldview in its most comprehensive form. For new readers, this is the place to start. The articles are roughly organised into topics, although there is often considerable overlap.

We are reaching limits to growth in so many ways at the same time, but it is not enough to understand which are the limiting factors, but also what time frame each particular subset of reality operates over, and therefore which is the key driver at what time. We can think of the next century as a race of hurdles we need to clear. We need to know how to prepare for each as it approaches, as we need to clear each one in order to be able to stay in the race.

TAE is known primarily as a finance site because finance has the shortest time frame of all. So much of finance exists in a virtual world in which changes can unfold very quickly. There are those who assume that changes in a virtual system can happen without major impact, but this assumption is dangerously misguided. Finance is the global operating system – the interface between ourselves, our institutions and our resource base. When the operating system crashes, nothing much will work until the system is rebooted. The next few years will see that crash and reboot. As financial contraction is set to occur first, finance will be the primary driver to the downside for the next several years. After that, we will be dealing with energy crisis, other resource limits, limitations of carrying capacity and increasing geopolitical ramifications.

The global financial system is rapidly approaching a Minsky Moment:

“A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them.

Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.”

This is the inevitable result of decades of ponzi finance, as our credit bubble expanded relentlessly, leaving us today with a giant pile of intertwined human promises which cannot be kept. Bubbles create, and rely on, building stacks of IOUs ever more removed from any basis in underlying real wealth. When the bubble finally implodes, the value of those promises disappears as it becomes obvious they will not be kept. Bust follows boom, as it has done throughout human history. The ensuing Great Collateral Grab will reveal just how historically under-collateralized our supposed prosperity has become. Very few of the myriad claims to underlying real wealth can actually be met, leaving the excess claims to be exposed as empty promises. These are destined to be rapidly and messily extinguished in a deflationary implosion.

While we cannot tell you exactly when the bust will unfold in specific locations, we can see that it is already well underway in some parts of the world, notably the European periphery. Given that preparation takes time, and that one cannot be late, now is the time to prepare, whether one thinks the Great Collateral Grab will manifest close to home next month or next year. Those who are not prepared risk losing everything, very much including their freedom of action to address subsequent challenges as they arise. It would be a tragedy to fall at the first hurdle, and then be at the mercy of whatever fate has to throw at you thereafter. The Automatic Earth has been covering finance, market psychology and the consequences of excess credit and debt since our inception, providing readers with the tools to navigate a major financial accident.

 

Ponzi Finance

Nicole: From the Top of the Great Pyramid
Nicole: The Infinite Elasticity of Credit
Nicole: Look Back, Look Forward, Look Down. Way Down
Nicole: Ragnarok – Iceland and the Doom of the Gods
Ilargi: Iceland To Take Back The Power To Create Money
Ilargi: The Only Thing That Grows Is Debt
Ilargi: Central Banks Are Crack Dealers and Faith Healers
Nicole: Promises, Promises … Detroit, Pensions, Bondholders And Super-Priority Derivatives
Nicole: Where the Rubber Meets the Road in America
Ilargi: How Our Aversion To Change Leads Us Into Danger
Ilargi: Debt In The Time Of Wall Street
Ilargi: The Contractionary Vortex Of The Lumpen Proletariat
Ilargi: Hornswoggled Absquatulation

 


Fred Stein Evening, Paris 1934

 

The Velocity of Money and Deflation

Nicole: The Resurgence of Risk
Nicole: Inflation Deflated
Nicole: The Unbearable Mightiness of Deflation
Nicole: Debunking Gonzalo Lira and Hyperinflation
Nicole: Dollar-Denominated Debt Deflation
Nicole: Deflation Revisited: The Studio Version
Nicole: Stoneleigh Takes on John Williams: Deflation It Is
Ilargi: US Hyperinflation is a Myth
Ilargi: Everything’s Deflating And Nobody Seems To Notice
Ilargi: The Velocity of the American Consumer
Ilargi: Deflation, Debt and Gravity
Ilargi: Debt, Propaganda And Now Deflation
Ilargi: The Revenge Of A Government On Its People

 

Markets and Psychology

Nicole: Markets and the Lemming Factor
Ilargi: You Are Not an Investor
Nicole: Over the Edge Lies Fear
Nicole: Capital Flight, Capital Controls and Capital Fear
Nicole: The Future Belongs to the Adaptable
Nicole: A Future Discounted
Ashvin Pandurangi: A Glimpse Into the Stubborn Psychology of 'Fish'
Ashvin Pandurangi: A Glimpse Into the Self-Destructive Psychology of 'Sharks'
Ilargi: Institutional Fish
Ilargi: Optimism Bias: What Keeps Us Alive Today Will Kill Us Tomorrow
Nicole: Volatility and Sleep-Walking Markets

 

Real Estate

Ilargi: Our Economies Run On Housing Bubbles
Nicole: Welcome to the Gingerbread Hotel
Nicole: Bubble Case Studies: Ireland and Canada
Ilargi: Don’t Buy A Home: You’ll Get Burned

 


Berenice Abbott Murray Hill Hotel, New York 1937

 

Metals, Currencies, Interest Rates, and the War on Cash

Nicole: Gold – Follow the Yellow Brick Road?
Nicole: A Golden Double-Edged Sword
Ilargi: Square Holes and Currency Pegs
Nicole: The Special Relativity of Currencies
Nicole: Negative Interest Rates and the War on Cash
Ilargi: This Is Why The Euro Is Finished
Ilargi: The Broken Model Of The Eurozone
Ilargi: Central Banks Upside Down
Ilargi: The Only Man In Europe Who Makes Any Sense

 

China’s Epic Bubble

Nicole: China And The New World Disorder
Ilargi: Meet China’s New Leader: Pon Zi
Ilargi: China Relies On Property Bubbles To Prop Up GDP
Ilargi: Deflation Is Blowing In On An Eastern Trade Wind
Ilargi: China: A 5-Year Plan And 50 Million Jobs Lost
Ilargi: The Great Fall Of China Started At Least 4 Years Ago
Ilargi: Time To Get Real About China
Ilargi: Where Is China On The Map Exactly?

 

Commodities, Trade and Geopolitics

Nicole: Et tu, Commodities?
Nicole: Commodities and Deflation: A Response to Chris Martenson
Nicole: Then and Now: Sunshine and Eclipse
Nicole: The Rise and Fall of Trade
Nicole: The Death of Democracy in a Byzantine Labyrinth
Nicole: The Imperial Eurozone (With all That Implies)
Ilargi: The Troika And The Five Families
Ilargi: Globalization Is Dead, But The Idea Is Not
Nicole: Entropy and Empire
Ilargi: There’s Trouble Brewing In Middle Earth

 


Giotto Legend of St Francis, Exorcism of the Demons at Arezzo c.1297-1299

 

The second limiting factor is likely to be energy, although this may vary with location, given that energy sources are not evenly distributed. Changes in supply and demand for energy are grounded in the real world, albeit in a highly financialized way, hence they unfold over a longer time frame than virtual finance. Over-financializing a sector of the real economy leaves it subject to the swings of boom and bust, or bubbles and their aftermath, but the changes in physical systems typically play out over months to years rather than days to weeks. 

Financial crisis can be expected to deprive people of purchasing power, quickly and comprehensively, thereby depressing demand substantially (given that demand is not what one wants, but what one can pay for). Commodity prices fall under such circumstances, and they can be expected to fall more quickly than the cost of production, leaving margins squeezed and both physical and financial risk rising sharply. This would deter investment for a substantial period of time. As a financial reboot begins to deliver economic recovery some years down the line, the economy can expect to hit a hard energy supply ceiling as a result. Financial crisis initially buys us time in the coming world of hard energy limits, but at the expense of worsening the energy crisis in the longer term.

Energy is the master resource – the capacity to do work. Our modern society is the result of the enormous energy subsidy we have enjoyed in the form of fossil fuels, specifically fossil fuels with a very high energy profit ratio (EROEI). Energy surplus drove expansion, intensification, and the development of socioeconomic complexity, but now we stand on the edge of the net energy cliff. The surplus energy, beyond that which has to be reinvested in future energy production, is rapidly diminishing. We would have to greatly increase gross production to make up for reduced energy profit ratio, but production is flat to falling so this is no longer an option. As both gross production and the energy profit ratio fall, the net energy available for all society’s other purposes will fall even more quickly than gross production declines would suggest. Every society rests on a minimum energy profit ratio. The implication of falling below that minimum for industrial society, as we are now poised to do, is that society will be forced to simplify.

A plethora of energy fantasies is making the rounds at the moment. Whether based on unconventional oil and gas or renewables (that are not actually renewable), these are stories we tell ourselves in order to deny that we are facing any kind of future energy scarcity, or that supply could be in any way a concern. They are an attempt to maintain the fiction that our society can continue in its current form, or even increase in complexity. This is a vain attempt to deny the existence of non-negotiable limits to growth. The touted alternatives are not energy sources for our current society, because low EROEI energy sources cannot sustain a society complex enough to produce them.

We are poised to throw away what remains of our conventional energy inheritance chasing an impossible dream of perpetual energy riches, because doing so will be profitable for the few in the short term, and virtually no one is taking a genuine long term view. We will make the transition to a lower energy society much more difficult than it need have been. At The Automatic Earth we have covered these issues extensively, pointing particularly to the importance of net energy, or energy profit ratios, for alternative supplies. We have also addressed the intersections of energy and finance.

 

Energy, EROEI, Finance and ‘Above Ground Factors’

Nicole: Energy, Finance and Hegemonic Power
Ilargi: Cheap Oil A Boon For The Economy? Think Again
Ilargi: We’re Not In Kansas Anymore
Ilargi: Not Nearly Enough Growth To Keep Growing
Ilargi: Why The Global Economy Will Disintegrate Rapidly
Ilargi: The Price Of Oil Exposes The True State Of The Economy
Ilargi: More Than A Quantum Of Fragility
Ilargi: (Re-)Covering Oil and War
Nicole: Oil, Credit and the Velocity of Money Revisited
Nicole: Jeff Rubin and Oil Prices Revisited
Charlie Hall: Peak Wealth and Peak Energy
Ken Latta: When Was America’s Peak Wealth?
Ken Latta: Go Long Chain Makers
Euan Mearns: The Peak Oil Paradox – Revisited
Ilargi: At Last The ‘Experts’ Wake Up To Oil
Ilargi: Oil, Power and Psychopaths
Nicole: A Mackenzie Valley Pipe-Dream?

 

Unconventional Oil and Gas

Nicole: Get Ready for the North American Gas Shock
Nicole: Shale Gas Reality Begins to Dawn
Nicole: Unconventional Oil is NOT a Game Changer
Nicole: Peak Oil: A (Short) Dialogue With George Monbiot
Nicole: Fracking Our Future
Nicole: The Second UK Dash for Gas: A Faustian Bargain
Ilargi: Jobs, Shale, Debt and Minsky
Nicole (video): Sucking Beer Out Of The Carpet: Nicole Foss At The Great Debate in Melbourne
Ilargi: Shale Is A Pipedream Sold To Greater Fools
Ilargi: The Darker Shades Of Shale
Ilargi: Debt and Energy, Shale and the Arctic
Ilargi: London Is Fracking, And I Live By The River
Ilargi: And On The Seventh Day God Shorted His People
Ilargi: The Oil Market Actually Works, And That Hurts
Ilargi: Drilling Our Way Into Oblivion
Ilargi: Who’s Ready For $30 Oil?
Ilargi: US Shale And The Slippery Slopes Of The Law

 

Electricity and Renewables

Nicole: Renewable Energy: The Vision and a Dose of Reality
Nicole: India Power Outage: The Shape of Things to Come
Nicole: Smart Metering and Smarter Metering
Nicole: Renewable Power? Not in Your Lifetime
Nicole: A Green Energy Revolution?
Nicole: The Receding Horizons of Renewable Energy
Euan Mearns: Broken Energy Markets and the Downside of Hubbert’s Peak

 


Underwood&Underwood Chicago framed by Gothic stonework high in the Tribune Tower 1952

 

In the aftermath of the Fukushima disaster, TAE provided coverage of the developing catastrophe, drawing on an earlier academic background in nuclear safety. It will be many years before the true impact of Fukushima is known, both because health impacts take time to be demonstrable and because the radiation releases are not over. The destroyed reactors continue to leak radiation into the environment, and are likely to do so for the foreseeable future. The vulnerability of the site to additional seismic activity is substantial, and the potential for further radiation releases as a result is similarly large. The disaster is therefore far worse than it first appeared to be. The number of people in harms way, for whom no evacuation is realistic despite the risk, is huge, and the health impacts will prove to be tragic, particularly for the young.

 

Fukushima and Nuclear Safety

Nicole: How Black is the Japanese Nuclear Swan?
Nicole: The Fukushima Fallout Files
Nicole: Fukushima: Review of an INES class 7 Accident
Nicole: Fukushima: Fallacies, Fallout, Fundamentals and Fear
Nicole: Welcome to the Atomic Village

 

The Automatic Earth takes a broad view of the context in which finance, energy and resources operate, looking at issues of how society functions at a macro level. Context is vital to understanding the bigger picture, particularly human context as it relates to the critical factor of scale and the emergent properties that flow from it. We have continually emphasised the importance of the trust horizon; in determining what functions at what time, and what kind of social milieu we can expect as matters evolve.

Expansions are built upon the optimistic side of human nature and tend to lead to greater inclusiveness and recognition of common humanity over time. Higher levels of political aggregation, and more complex webs of trading relationships, come into being and achieve popular support thanks to the benefits they confer. In contrast, contractions tend to reveal, and be driven by, the darker and more pessimistic side of human collective psychology. They are social and are political as well as economic. In both directions, collective attitudes can create their own self-fulfilling prophecies at the societal level.

Trust determines effective organisational scale, extending political legitimacy to higher levels of political organisation during expansions and withdrawing it during periods of contraction, leaving political entities beyond the trust horizon. Where popular legitimacy is withdrawn, organisational effectiveness is substantially undermined, and much additional effort may go into maintaining control at that scale through surveillance and coercion.

The effort is destined to fail over the longer term, and smaller scale forms of organisation, still within the trust horizon, may come to hold much greater significance. The key to effective action is to know at what scale to operate at any given time. As we have said before, while one cannot control the large scale waves of expansion and contraction that unfold over decades or centuries, understanding where a given society finds itself within that wave structure can allow people and their communities to surf those waves.

 

Scale and Society

Nicole: Scale Matters
Nicole: Economics and the Nature of Political Crisis
Nicole: Fractal Adaptive Cycles in Natural and Human Systems
Nicole: Entropy and Empire
Nicole: The Storm Surge of Decentralization
Ilargi: When Centralization Scales Beyond Our Control
Ilargi: London Bridge is (Broken) Down
Ilargi: The Great Divide
Ilargi: Quote of the Year. And The Next
Nicole: Corruption, Culpability and Short-Termism
Ilargi: The Value of Wealth
Ilargi: The Most Destructive Generation Ever
Ilargi: Ain’t Nobody Like To Be Alone

 

Trust and the Psychology of Contraction

Nicole: Beyond the Trust Horizon
Nicole: Bubbles and the Titanic Betrayal of Public Trust
Ilargi: Why There Is Trump
Ilargi: Who’s Really The Fascist?
Ilargi: Ungovernability
Ilargi: Comey and the End of Conversation
Ilargi: Eurodystopia: A Future Divided
Nicole: War in the Labour Markets
Nicole: An Unstable Tower of Breaking Promises
Ilargi: Libor was a criminal conspiracy from the start

 

Affluence, Poverty and Debt and Insurance

Nicole: Trickles, Floods and the Escalating Consequences of Debt
Nicole: Crashing the Operating System: Liquidity Crunch in Practice
Ilargi: The Impossible and the Inevitable
Nicole: The View From the Bottom of the Pyramid
Ilargi: The Lord of More
Ilargi: The Last of the Affluent, the Carefree and the Innocent
Ilargi: The Worth of the Earth
Nicole: Risk Management And (The Illusion Of) Insurance

 


Fred Stein Streetcorner, Paris 1930s

 

Finally, TAE has provided some initial guidance as to how to position one’s self, family, friends and community so as to reduce vulnerability to system shocks and increase resilience. The idea is to reduce the range of dependencies on the large scale, centralised life-support systems that characterise modernity, and also to reduce dependency on the solvency of middle men. The centralised systems we take so much for granted are very likely to be much less reliable in the future. For a long time we have uploaded responsibility to larger scale organisational entities, but this has led to a dangerous level of complacency.

It is now time to reclaim responsibility for our own future by seeking to understand our predicament and take local control of efforts to mitigate its effects. While we cannot prevent a bubble from bursting once it has been blown, we can make a substantial difference to how widely and deeply the impact is felt. The goal is to provide a sufficient cushion of basic essentials to allow as many people as possible to preserve the luxury of the longer term view, rather than be pitched into a state of short term crisis management. In doing so we can hope to minimise the scale of the human over-reaction to events beyond our control. In the longer term, we need to position ourselves to reboot the system into something simpler, more functional and less extractive of the natural capital upon which we and subsequent generations depend.

 

Solution Space, Preparation and Food Security

Nicole: The Boundaries and Future of Solution Space
Nicole: Facing the Future – Mitigating a Liquidity Crunch
Nicole: 40 Ways to Lose Your Future
Nicole: How to Build a Lifeboat
Nelson Lebo: Resilience is The New Black
Nelson Lebo: What Resilience Is Not
Nicole: Sandy: Lessons From the Wake of the Storm
Nicole: Crash on Demand? – A Response to David Holmgren
Nicole: Finance and Food Insecurity
Nicole: Physical Limits to Food Security – Water and Climate
Ilargi: Basic Income in The Time of Crisis
Nelson Lebo: (Really) Alternative Banking Systems
Nicole (video): Interview Nicole Foss for ‘A Simpler Way: Crisis as Opportunity’
Happen Films: A Simpler Way: Crisis as Opportunity (full video)

 

 

Sep 192016
 
 September 19, 2016  Posted by at 1:25 pm Finance Tagged with: , , , , , , , , ,  Comments Off on China Relies On Property Bubbles To Prop Up GDP
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Carl Mydans Sharecropper’s family in Mississippi County, Missouri 1936

Lots of China again today. Most of it based on warnings, coming from the BIS, about the country’s financial shenanigans. I’m getting the feeling we have gotten so used to huge and often unprecedented numbers, viewed against the backdrop of an economy that still seems to remain standing, that many don’t know what to make of this anymore.

Ambrose Evans-Pritchard ties the BIS report to Hyman Minsky’s work, which is kind of funny, because our good friend and Minsky adept Steve Keen is the economist who most emphasizes the need to differentiate between public and private debt, in particular because public debt is not a big risk whereas private debt certainly is.

And that happens to be the main topic where people seem to get confused about China. To quote Ambrose: “..Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP..”

The big Kahuna question then becomes: should Chinese outstanding loans and corporate debt be seen as public debt or private debt, given that the dividing line between state and corporations is as opaque and shifting as it is? Even the BIS looks confused. I’ll address that below. First, here’s Ambrose:

BIS Flashes Red Alert For a Banking Crisis in China

The Bank for International Settlements warned in its quarterly report that China’s “credit to GDP gap” has reached 30.1%, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis.

Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed.

[..] Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night. The BIS said there are ample reasons to worry about the health of world’s financial system. Zero interest rates and bond purchases by central banks have left markets acutely sensitive to the slightest shift in monetary policy, or even a hint of a shift.

Bloomberg commented on the same BIS report:

BIS Warning Indicator for China Banking Stress Climbs to Record

[..] the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis. In a financial stability report published in June, China’s central bank said lenders would be able to maintain relatively high capital levels even if hit by severe shocks.

While the BIS says that credit-to-GDP gaps exceeded 10% in the three years preceding the majority of financial crises, China has remained above that threshold for most of the period since mid-2009, with no crisis so far. In the first quarter, China’s gap exceeded the levels of 41 other nations and the euro area. In the U.S., readings exceeded 10% in the lead up to the global financial crisis.

 

Why am I getting the feeling that the BIS thinks perhaps just this one time ‘things will be different’? If the credit-to-GDP gap (difference with long-term trend) anywhere exceeded 10%, that was a harbinger of the majority of financial crisis. But in China to date, with a 30.1% print, ‘the state’s control of the financial system and limited levels of overseas debt may mitigate against the risk of a banking crisis’. That sounds like someone’s afraid to state the obvious out loud.

If you ask me there’s a loud and clear writing on the Great Wall. But regardless, I didn’t set out to comment on the BIS, I just used that to introduce something else. That is to say, early today, CNBC ran an article on the Chinese property market, seen through the eyes of Donna Kwok, senior China economist at UBS.

Donna sees some light in fast rising home prices (an ‘improvement’..) but also acknowledges they constitute a challenge. She mentions bubbles – she even sees ‘uneven bubbles’, a lovely term, and ‘selective pockets of bubbles’-, but she does seem to understand what’s going on, even if she doesn’t put it in the stark terminology that seems to fit the issue.

CNBC names the article “China Faces Policy Dilemma As Home Prices Jump In GDP Boost”, an ambiguous enough way of putting things. A second title that pops up but has apparently been rejected by the editor is: “Chinese Property Market Is Improving: UBS”. That would indeed have been a bit much. Because calling a bubble an improvement is like tempting the gods, or worse.

I adapted the title to better fit the contents:

China Relies on Housing Bubble to Keep GDP Numbers Elevated (CNBC)

Policymakers in China were facing the dilemma of driving growth while preventing the property market from overheating, an economist said Monday as prices in the world’s second largest economy jumped in August. Average new home prices in China’s 70 major cities rose 9.2% in August from a year earlier, accelerating from a 7.9% increase in July, an official survey from the National Bureau of Statistics showed Monday. Home prices rose 1.5% from July. But according to Donna Kwok, senior China economist at UBS, the importance of the property sector to China’s overall economic health, posed a challenge.

It contributes up to one-third of GDP as its effects filter through to related businesses such as heavy industries and raw materials. “On the one hand, they need to temper the signs of froth that we are seeing in the higher-tier cities. On the other hand, they are still having to rely on the (market’s) contribution to headline GDP growth that property investment as the whole—which is still reliant on the lower-tier city recovery—generates…so that 6.5 to 7% annual growth target is still met for this year,” Kwok told CNBC’s “Street Signs.”

The data showed prices in the first-tier cities of Shanghai and Beijing prices rose 31.2% and 23.5%, respectively. Home prices in the second tier cities of Xiamen and Hefei saw the larges price gains, rising 43.8% and 40.3% respectively, from a year ago. Earlier, the Chinese government introduced measures aimed at boosting home sales to reduce large inventories in an effort to limit an economic slowdown. While the moves have boosted prices in top-tier cities with some spillover in lower-tier cities, there were still concerns of uneven bubbles in the market.

“We are seeing potential signs of selective pockets of bubbles appearing again, especially in tier 1 and tier 2 cities,” Kwok said. The Chinese government in the meantime was rolling out selective cooling measures in these cities to try to even out growth. “If it’s navigated in a such a way that the (positive) spillover to the adjacent tier 3 cities continues to spread further, then maybe that’s where you may get a first or second best outcome resulting,” she added.

To summarize: China can only achieve its 6.5 to 7% annual GDP growth target if the housing bubble(s) persist, and that’s the one thing bubbles never do.

If housing makes up -directly and indirectly, after ‘filtering through’- one third of Chinese GDP, which is officially still growing at more than 6.5%, then the effects of a housing crash in the Middle Kingdom should become obvious. That is, if the property market merely comes to not even a crash but just a standstill, GDP growth will be close to 4%. And that is before we calculate how that in turn will also ‘filter through’, a process that would undoubtedly shave off another percentage point of GDP growth.

So then we’re at 3% growth, and that’s optimistic, that would require just a limited ‘filtering through’. If the Chinese housing sector shrinks or even collapses, and given that there is a huge property bubble -intentionally- being built on top of the latest -recent- bubble, shrinkage is the least that should be expected, then China GDP growth will fall below that 3%.

And arguably down the line even in a best case scenario both GDP growth and GDP -the economy itself-, will flatline if not fall outright. Since China’s entire economic model has been built to depend on growth, negative growth will hammer its economy so hard that the Communist Party will face protests from a billion different corners as its citizens will see their assets crumble in value.

What at some point will discourage Beijing from keeping on keeping blowing more bubbles to replace the ones that deflate, as it has done for years now, is that China desperately seeks for the renminbi/yuan to be a reserve currency, it’s aiming to be included in ‘the’ IMF basket as soon as October 1 this year.

That is not a realistic prospect if and when the currency continues to be used to prop up the economy, housing, unprofitable industries etc. Neither the IMF nor the other reserve currencies in the basket can allow for the addition of the yuan if its actual value is put at risk by trying to deflect the most basic dynamics of markets, not to that extent. And not at that price either.

The Celestial Empire will be forced to choose, but it’s not clear if it either acknowledges, or is willing to make, such a choice. Still, it won’t be able to absorb all private debt and make it public, and still play in the big leagues, even if other major countries and central banks play fast and loose with the system too.

Aug 192016
 
 August 19, 2016  Posted by at 2:25 pm Finance Tagged with: , , , , , , , , ,  9 Responses »
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Opening of Golden Gate Bridge May 27 1937

This is an absolute must see, and a joy to watch. Longtime friend of the Automatic Earth Steve Keen was on BBC’s Hardtalk over the weekend. I already really liked the 2.30min clip the BBC released earlier this week. Now Steve himself has posted the entire interview, while the BBC only has an audio podcast (for anyone outside the UK).

You can see that Steve came prepared for some ‘hard’ questioning, and the format fits him very well. Kudo’s! Also, kudo’s to the BBC for having him on, perhaps alternative views on economics have become more palatable in Britain post-Brexit? Interviewer Stephen Sackur sound quite typical of what I see in British media almost 2 months after Brexit: fear and uncertainty and the overall notion that leaving the EU is a very bad thing. Time to move on, perhaps?

I’m not sure Steve would join me in professing the term Beautiful Brexit, but our views on the EU are remarkably alike: it’s a dangerous club (and it will end up imploding no matter what). And that is in turn remarkable unlike the view of our friend Yanis Varoufakis, who is seeking to reform the union.

I went to see Yanis’ presentation of his DiEM25 initiative on the island of Aegina, off Athens, last week, and I found far too much idealism there. There were DiEM25 members from France, Italy and Spain, and they all seemed to agree on one thing: “we need” a pan-European organization -of sorts-. But do we? And why? In my view, they ignore those questions far too easily.

Moreover, even if we choose that path, why the EU? For me, as I said to the people I was with last week, reforming the EU is like reforming the mafia: you don’t want to go there, you want to dissolve it and shut it down. What the EU is today is the result of 60+ years of building an anti-democratic structure that involves and feeds tens of thousands of people, and you’re not going to break that down in any kind of short term.

Though it’s politically ‘not done’, I do think Boris Johnson was on to something when he said during the Brexit campaign: “Napoleon, Hitler, various people tried this out, and it ends tragically. The EU is an attempt to do this by different methods [..] But fundamentally, what is lacking is the eternal problem, which is that there is no underlying loyalty to the idea of Europe. There is no single authority that anybody respects or understands. That is causing this massive democratic void.”

When he said it in May, it was used as campaign fodder by the Remain side, though ironically they never mentioned Napoleon, only Hitler. “How dare you make that comparison!” But Johnson could have mentioned Charlemagne or Charles V, or Julius Ceasar just as well. They all tried to unify Europe, and all with pretty bloody results.

And just like all the idealism I see today in DiEM25, there were plenty idealists at the foundation of the EU, too. But again it’s going awfully wrong. Diversity is what makes Europe beautiful, and trying to rule over it from a centralized place threatens that diversity. European nations have a zillion ways to work together, but a central government and a central bank, plus a one-currency system, that is not going to work.

Still, before I get people proclaiming for instance that Steve Keen is a fan of Boris Johnson, which I’m sure he’s not and neither am I, we’re both fans of Yanis Varoufakis, just not on this issue, but before I make people make that link, I’ll shut up and hand you over to Steve.

But not before reiterating once more that in my view none of this EU talk really matters, because centralization can exist only in times of -economic- growth (or dictatorship), and we’re smack in the middle of a non-growth era kept hidden from us by a veil of gigantesque debt issuance. The future is going to be localization, protectionism, name it what you want; feel free to call it common sense. It will happen regardless of what you call it.

 

 

 

 

Jul 312016
 
 July 31, 2016  Posted by at 9:05 am Finance Tagged with: , , , , , , , , ,  1 Response »
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DPC Elks Temple (Eureka Club), Rochester, NY 1908

How Slow Is US Economic Growth? ‘Close To Zero’ (CNBC)
US Non-Consumer Economy Is Now In A Recession (ZH)
US Government Entitlements – Sixth Biggest Economy On Earth (Stockman)
Helicopter Money Talk Takes Flight As Bank of Japan Runs Out Of Runway (R.)
No Clean Bill Of Health For EU Banks In Stress Test (R.)
Ireland Jails Three Top Bankers Over 2008 Banking Meltdown (R.)
Australia’s Property Market Is Completely Bonkers (Schwab)
Minsky’s Moment (Economist)
The IMF Confesses It Immolated Greece On Behalf Of The Eurogroup (YV)
Econocracy Has Split Britain Into Experts And Ordinary People (G.)
Network Close To NATO Military Leader Fueled Ukraine Conflict (Spiegel)
America’s Military Is “Lender Of Last Resort” (Cate Long)

 

 

Not a pretty picture.

How Slow Is US Economic Growth? ‘Close To Zero’ (CNBC)

While 2016’s anemic growth level isn’t an automatic disqualifier for an interest rate increase, the bar just got a little higher. Friday’s GDP reading fell below even the dimming hopes on Wall Street. The 1.2% growth ratein the second quarter combined with a downward revision to the first three months of the year to produce an average growth rate of just 1%. In total, it was far below the Wall Street forecast of 2.6% second-quarter growth and didn’t lend a lot of credence to a Fed statement earlier this week that sounded more confident on the economy. (The Atlanta Fed was much closer, forecasting 1.8%.) In short, they are not numbers upon which a rate hawk would want to hang one’s hat.

“We’re tired of talking about rate hikes when it’s not going to happen for a while,” Diane Swonk of DS Economics told CNBC. “I really think the Fed is sidelined until the end of the year. Or, perhaps, longer. Market expectations for the next Fed hike had been sliding as the release of the GDP report got closer, and they plunged afterward. The fed funds futures market Friday morning was indicating just a 34.4% chance of a rate rise this year, with the next move pushed out until well into 2017. A day earlier, the futures market had moved to just over 50% for a 2016 move. The Fed last hiked in December 2015, which was the first move after eight years of keeping the overnight rate near zero.

To be sure, GDP growth is just one input for the central bank. Ostensibly, the Fed’s mandate is to ensure full employment and price stability, and it has come close to achieving the former while continually falling short of the latter. [..] .. the Fed has been warning about weak business investment, and Friday’s data showed those concerns were well-founded. Business investment fell 2.2%, its third consecutive quarterly decline. Gross private domestic investment tumbled 9.7%, and residential investment, which had been on the rise, reversed course and declined 6.1%, the first decrease since early 2014. Those numbers act as a counterweight to the declining jobless rate, which is down to 4.9%.

“What is really worrying is that pace has still been enough to reduce the unemployment rate further, suggesting that the economy’s potential growth rate could conceivably be close to zero,” Paul Ashworth, chief U.S. economist at Capital Economics, said in a note. The headline jobless rate has been declining, in part, due to a generational low in labor force participation, suggesting that outside a decline in labor slack, there’s little moving economic growth.

Read more …

And consumer spending is set to contract sharply.

US Non-Consumer Economy Is Now In A Recession (ZH)

While yesterday’s GDP report was an undisputed disappointment, printing at 1.2% or less than half the 2.5% expected following dramatic historical data revisions, an even more troubling finding emerged when looking at the annual growth rate of GDP.  This is how Deutsche Bank’s Dominic Konstam summarized what we showed yesterday

The latest GDP release favors our hypothesis of an imminent endogenous labor market slowdown over a more optimistic scenario in which productivity will replace employment as the engine for growth. With real GDP growing at just 1.2%, there is little evidence that productivity is ready to do the heavy lifting. We are particularly concerned because annual nominal growth has slowed to 2.4%, essentially a cyclical trough

He was looking at the following chart (which as the BEA admitted yesterday, may be revised even lower in coming quarters).

 

However, as it turns out, that was not even the biggest risk. Recall that even as overall GDP rose a paltry 1.2%, somehow the consumer-driven portion of this number soared, with Personal Consumption Expenditures surging at an annualized 2.8% rate, nearly triple that recorded in the first quarter.

This means that the non-consumer part of the US economy subtracted 1.6% from GDP growth in the second quarter. In fact, as Deutsche Bank calculates, on an annual basis, the non-consumer portion of the economy is shrinking, i.e., in a recession, not only in real terms but also in nominal terms.

Read more …

More parts of Stockman’s upcoming book ‘Trumped’.

US Government Entitlements – Sixth Biggest Economy On Earth (Stockman)

……..Because the main street economy is failing, the nation’s entitlement rolls have exploded. About 110 million citizens now receive some form of means tested benefits. When social security is included, more than 160 million citizens get checks from Washington. The total cost is now $3 trillion per year and rising rapidly. America’s entitlements sector, in fact, is the sixth biggest economy in the world. Yet in a society that is rapidly aging to the tune of 10,000 baby boom retirees per day, this 50% dependency ratio is not even remotely sustainable. As we show in a later chapter, social security itself will be bankrupt within 10 years. Still, there is another even more important aspect of the mainstream narrative’s absolute radio silence about the monumental entitlements problem.

Like in the case of the nation’s 30-year LBO, the transfer payments crisis is obfuscated by the economic blind spots of our Keynesian central banking regime. Greenspan, Bernanke, Yellen and their posse of paint-by-the-numbers economic plumbers have deified the great aggregates of consumer, business and government spending as the motor force of economic life. As more fully deconstructed below, however, this boils down to a primitive notion of bathtub economics. In this bogus economic model, it is assumed that the supply-side of the economy is always fully endowed or even over-provided. By contrast, the perennial problem is purportedly a shortfall of an ether called “aggregate demand”.

Read more …

Can we please stop talking about it, and do it already?

Helicopter Money Talk Takes Flight As Bank of Japan Runs Out Of Runway (R.)

In the narrowest sense, a government can arrange a helicopter drop of cash by selling perpetual bonds, which never need to be repaid, directly to the central bank. Economists do not expect this in Japan, but they do see a high chance of mission creep, with the BOJ perhaps committing to buy municipal bonds or debt issued by state-backed entities, giving its interventions more impact than in the treasury bond market, where it is currently buying 80 trillion yen a year of Japanese government bonds (JGBs) from financial institutions. “Compared with government debt, these assets have low trading volume and low liquidity, so BOJ purchases stand a high chance of distorting these markets,” said Shinichi Fukuda, a professor of economics at Tokyo University.

“Prices would have an upward bias, so even if the BOJ bought at market rates, this would be considered close to helicopter money.” Other options include creating a special account at the BOJ that the government can always borrow from, committing to hold a certain%age of outstanding government debt or buying corporate bonds, economists say. With the BOJ’s annual JGB purchases already more than twice the volume of new debt issued by the government, Japan has already adopted something akin to helicopter money, said Etsuro Honda, a former special adviser to the Cabinet and a key architect of Abe’s reflationary economic policy. But it has not been enough to stop consumer prices falling in June at their fastest since the BOJ began quantitative easing in 2013.

Read more …

And these are half-ass stress tests designed to let banks pass.

No Clean Bill Of Health For EU Banks In Stress Test (R.)

Banks from Italy, Ireland, Spain and Austria fared worst in the latest European Union stress test, which the region’s banking watchdog said on Friday showed there was still work to do in order to boost credit to the bloc’s economy. Eight years since the collapse of Lehman Brothers sparked a global banking meltdown, many of Europe’s banks are still saddled with billions of euros in poorly performing loans, crimping their ability to lend and putting off investors. “While a number of individual banks have clearly fared badly, the overall finding of the European Banking Authority – that Europe’s banks are resilient to another crisis – is heartening,” Anthony Kruizinga at PwC said. Italy’s Monte dei Paschi, Austria’s Raiffeisen, Spain’s Banco Popular and two of Ireland’s main banks came out with the worst results in the EBA’s test of 51 EU lenders.

“Whilst we recognize the extensive capital raising done so far, this is not a clean bill of health,” EBA Chairman Andrea Enria said in a statement. “There remains work to do.” Italy’s largest lender, UniCredit, was also among those banks which fared badly, and it said it will work with supervisors to see if it should take further measures. Germany’s biggest banks, Deutsche Bank and Commerzbank, were also among the 12 weakest banks in the test, along with British rival Barclays. Monte dei Paschi, Italy’s third largest lender, had been scrambling to pull together a rescue plan and win approval for it from the ECB ahead of the test results. The Italian bank confirmed less than an hour before the results that it had finalised a plan to sell off its entire portfolio of non-performing loans and had assembled a consortium of banks to back a €5 billion capital increase.

Read more …

More!

Ireland Jails Three Top Bankers Over 2008 Banking Meltdown (R.)

Three senior Irish bankers were jailed on Friday for up to three-and-a-half years for conspiring to defraud investors in the most prominent prosecution arising from the 2008 banking crisis that crippled the country’s economy. The trio will be among the first senior bankers globally to be jailed for their role in the collapse of a bank during the crisis. The lack of convictions until now has angered Irish taxpayers, who had to stump up €64 billion – almost 40% of annual economic output – after a property collapse forced the biggest state bank rescue in the euro zone. The crash thrust Ireland into a three-year sovereign bailout in 2010 and the finance ministry said last month that it could take another 15 years to recover the funds pumped into the banks still operating.

Former Irish Life and Permanent Chief Executive Denis Casey was sentenced to two years and nine months following the 74-day criminal trial, Ireland’s longest ever. Willie McAteer, former finance director at the failed Anglo Irish Bank, and John Bowe, its ex-head of capital markets, were given sentences of 42 months and 24 months respectively. All three were convicted of conspiring together and with others to mislead investors, depositors and lenders by setting up a €7.2 billion circular transaction scheme between March and September 2008 to bolster Anglo’s balance sheet. Irish Life placed the deposits via a non-banking subsidiary in the run-up to Anglo’s financial year-end, to allow its rival to categorize them as customer deposits, which are viewed as more secure, rather than a deposit from another bank.

Read more …

“..a couple of generations of Australians will be all the poorer for it…”

Australia’s Property Market Is Completely Bonkers (Schwab)

House prices are no longer a function of value but rather of how much people are prepared to pay. That in turn is determined by how much banks are willing to lend. And that amount continues to rise. Before the current boom started in 1997, the ratio of household debt to GDP was around 40% — it’s now more than 100% (it’s the same story for household income to household debt). In short, the banks are lending Australians a whole load of cash, and we’re using that cash to bid up the price of an unproductive asset (established housing).

The removal of housing prices from reality is almost total. Most investment advisers will tell you that the price of an asset is dependent on the income that asset generates. For example, the more a company earns (or more specifically, the more investors think that company will earn in the future), the higher its share price will rise. Given house and apartment prices are currently high (based on their terrible net rental yield) one would expect rents to be increasing significantly to justify their price. However, the data tells a very different story. CoreLogic found that Australian dwellings increased in price by 10% in the past year. In Sydney and Melbourne the price rises were even more significant, with Sydney increasing by 13% and Melbourne by 13.9%.

If the market had any degree of rationality, given the market is already expensive, rentals would have needed to rise by around 20% during the year to justify those price increases. However, CoreLogic also reported that Sydney rents were up a mere 0.4% and Melbourne up by 1.7% (both well below the inflation rate). That means if the market was insane a year ago, it’s even worse now. Already overprice property is increasing, in Sydney’s case, 20 times as fast as underlying income. The problem is no one seems to care what the banks do (least of all the government, even though taxpayers are on the hook if any of the big banks fall over, which if the history of banking is anything to go by is a virtual certainty at some point).

Moreover, successive governments’ taxation policies (negative gearing, no capital gains tax, minimal land tax) serve to exacerbate the insanity. How long will the boom last? Potentially some time. There are a lot of vested interests (banks, real estate industry, state governments, the media) who are utterly reliant on the bubble continuing. Sadly, a couple of generations of Australians will be all the poorer for it.

Read more …

“Economic stability breeds instability. Periods of prosperity give way to financial fragility. With overleveraged banks and no-money-down mortgages still fresh in the mind after the global financial crisis, Minsky’s insight might sound obvious.”

Minsky’s Moment (Economist)

Minsky distinguished between three kinds of financing. The first, which he called “hedge financing”, is the safest: firms rely on their future cashflow to repay all their borrowings. For this to work, they need to have very limited borrowings and healthy profits. The second, speculative financing, is a bit riskier: firms rely on their cashflow to repay the interest on their borrowings but must roll over their debt to repay the principal. This should be manageable as long as the economy functions smoothly, but a downturn could cause distress. The third, Ponzi financing, is the most dangerous. Cashflow covers neither principal nor interest; firms are betting only that the underlying asset will appreciate by enough to cover their liabilities. If that fails to happen, they will be left exposed.

Economies dominated by hedge financing—that is, those with strong cashflows and low debt levels—are the most stable. When speculative and, especially, Ponzi financing come to the fore, financial systems are more vulnerable. If asset values start to fall, either because of monetary tightening or some external shock, the most overstretched firms will be forced to sell their positions. This further undermines asset values, causing pain for even more firms. They could avoid this trouble by restricting themselves to hedge financing. But over time, particularly when the economy is in fine fettle, the temptation to take on debt is irresistible. When growth looks assured, why not borrow more? Banks add to the dynamic, lowering their credit standards the longer booms last.

If defaults are minimal, why not lend more? Minsky’s conclusion was unsettling. Economic stability breeds instability. Periods of prosperity give way to financial fragility. With overleveraged banks and no-money-down mortgages still fresh in the mind after the global financial crisis, Minsky’s insight might sound obvious. Of course, debt and finance matter. But for decades the study of economics paid little heed to the former and relegated the latter to a sub-discipline, not an essential element in broader theories. Minsky was a maverick. He challenged both the Keynesian backbone of macroeconomics and a prevailing belief in efficient markets.

Read more …

Yanis calling for heads to roll.

The IMF Confesses It Immolated Greece On Behalf Of The Eurogroup (YV)

[..] an urgent apology is due to the Greek people, not just by the IMF but also by the ECB and the Commission whose officials were egging the IMF on with the fiscal waterboarding of Greece. But an apology and a collective mea culpa from the troika is woefully inadequate. It needs to be followed up by the immediate dismissal of at least three functionaries. First on the list is Mr Poul Thomsen – the original IMF Greek Mission Chief whose great failure (according to the IMF’s own reports never before had a mission chief presided over a greater macroeconomic disaster) led to his promotion to the IMF’s European Chief status.

A close second spot in this list is Mr Thomas Wieser, the chair of the EuroWorkingGroup who has been part of every policy and every coup that resulted in Greece’s immolation and Europe’s ignominy, hopefully to be joined into retirement by Mr Declan Costello, whose fingerprints are all over the instruments of fiscal waterboarding. And, lastly, a gentleman that my Irish friends know only too well, Mr Klaus Masuch of the ECB. Finally, and most importantly, the apology and the dismissals will count for nothing if they are not followed by a complete U-turn over macroeconomic, fiscal and reform policies for Greece and beyond.

Is any of this going to happen? Or will the IMF’s IEO report light up the sky fleetingly, to be forgotten soon? The omens are pointing to the latter. In which case, the EU’s chances of regaining the confidence of its citizens, chances that are already too slim, will run through our leaders’ fingers like thin, white sand.

Read more …

“..the shift into an era of post-truth politics…”

Econocracy Has Split Britain Into Experts And Ordinary People (G.)

During the EU referendum debate almost the whole global economic and financial establishment lined up to warn of the consequences of Brexit, and yet 52% of the country ignored them. For many Remain voters it is a clear sign of the shift into an era of post-truth politics. While economists developed rigorous, evidence-based arguments, Leave campaigners slandered experts and appeared to pluck numbers out of the air. Yet they won. Post-truth politics is indeed a scary prospect but to avoid such a future we cannot simply blame “populist politicians” or “ill-informed voters”. We must understand the referendum in its wider context; economists must realise that they are both part of the problem and a necessary part of the solution. We are living in an econocracy.

Such a society seems like a democracy, with political parties and elections, but political goals are expressed in terms of their effect on “the economy”, and economic policymaking is viewed as a technical, not a political, activity. Areas of political life are increasingly delegated to experts, whether at the Bank of England, the government’s behavioural insights team, the Competition Commission or the Treasury. As members of Rethinking Economics, an international student movement seeking to reform the discipline of economics, we are campaigning for a more pluralist, critical and participatory approach. We conduct workshops in schools, run evening crash courses for adults, and this year launched Economy, a website providing accessible economic analysis of current affairs and a platform for lively public debate.

We want economists and citizens to join us in our mission to democratise economics. That’s because the language of economics has become the language of government, and as the experts on “the economy”, economists have secured a position of prestige and authority. Their rise has gone hand in hand with the increasing importance over the 20th century and beyond of the idea of the economy in political and social life. This idea in its modern use took hold only in the 1950s but today GDP growth is one of the central indicators of success for governments, and it is unheard of for a political party to win a general election without being viewed as competent on the economy.

We have also seen the economisation of daily life, so that parts of society as diverse as the arts and healthcare now justify their value in terms of their contribution to the economy. But in this process economists have largely ignored citizens and failed to consider their right to participate in discussion and decision-making.

Read more …

A bunch of dangerous sickos.

Network Close To NATO Military Leader Fueled Ukraine Conflict (Spiegel)

The newly leaked emails reveal a clandestine network of Western agitators around the NATO military chief, whose presence fueled the conflict in Ukraine. Many allies found in Breedlove’s alarmist public statements about alleged large Russian troop movements cause for concern early on. Earlier this year, the general was assuring the world that US European Command was “deterring Russia now and preparing to fight and win if necessary.” The emails document for the first time the questionable sources from whom Breedlove was getting his information. He had exaggerated Russian activities in eastern Ukraine with the overt goal of delivering weapons to Kiev. The general and his likeminded colleagues perceived US President Barack Obama, the commander-in-chief of all American forces, as well as German Chancellor Angela Merkel as obstacles.

Obama and Merkel were being “politically naive & counter-productive” in their calls for de-escalation, according to Phillip Karber, a central figure in Breedlove’s network who was feeding information from Ukraine to the general. “I think POTUS sees us as a threat that must be minimized,… ie do not get me into a war????” Breedlove wrote in one email, using the acronym for the president of the United States. How could Obama be persuaded to be more “engaged” in the conflict in Ukraine – read: deliver weapons – Breedlove had asked former Secretary of State Colin Powell. Breedlove sought counsel from some very prominent people, his emails show. Among them were Wesley Clark, Breedlove’s predecessor at NATO, Victoria Nuland, the assistant secretary of state for European and Eurasian affairs at the State Department, and Geoffrey Pyatt, the US ambassador to Kiev.

One name that kept popping up was Phillip Karber, an adjunct assistant professor at Georgetown University in Washington DC and president of the Potomac Foundation, a conservative think tank founded by the former defense contractor BDM. By its own account, the foundation has helped eastern European countries prepare their accession into NATO. Now the Ukrainian parliament and the government in Kiev were asking Karber for help. On February 16, 2015, when the Ukraine crisis had reached its climax, Karber wrote an email to Breedlove, Clark, Pyatt and Rose Gottemoeller, the under secretary for arms control and international security at the State Department, who will be moving to Brussels this fall to take up the post of deputy secretary general of NATO.

Karber was in Warsaw, and he said he had found surreptitious channels to get weapons to Ukraine – without the US being directly involved. According to the email, Pakistan had offered, “under the table,” to sell Ukraine 500 portable TOW-II launchers and 8,000 TOW-II missiles. The deliveries could begin within two weeks. Even the Poles were willing to start sending “well maintained T-72 tanks, plus several hundred SP 122mm guns, and SP-122 howitzers (along with copious amounts of artillery ammunition for both)” that they had leftover from the Soviet era. The sales would likely go unnoticed, Karber said, because Poland’s old weapons were “virtually undistinguishable from those of Ukraine.”

Read more …

What Trump said.

America’s Military Is “Lender Of Last Resort” (Cate Long)

America is slowly awakening from its long debt-induced slumber. It has conducted two major wars, a bailout of banks and a major stimulus program without raising taxes to pay for them. Because the Federal Reserve kept interest rates low, it was easy for politicians to continue to raise the debt ceiling and spend without making reductions in other areas of the budget. But those days have ended, the punch bowl has been removed and a new sobriety has rolled into our national capital. Even with its massive deficit problems, America has been providing security for its global allies for decades at no cost to them.

This resulted in spending 4.8% of GDP on U.S. military in 2010, which was ramped up from 3.0% in 2001, according to the Stockholm International Peace Research Institute. In contrast, you can see that European countries spent 1.73% of total GDP on military in 2010, which declined slightly from 1.99% in 2001. America has been subsidizing European military needs largely due to its role in the NATO alliance. The Council on Foreign Relations explains the new problems with this arrangement:

In 2011, then Secretary of Defense Robert Gates warned that ‘there will be dwindling appetite and patience in the U.S. . . . to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources to be serious and capable partners in their own defense.’ France in Mali is now a case in point; the Obama administration is providing only grudging assistance to an under-resourced French intervention.

[…] French military spending…has since 2001 exhibited a marked constancy—one which is inconsistent with the country’s newfound passion for military engagement. (Libya in March 2011 was another example of the French, as well as British, military biting off more than it could chew). It also highlights the need for the Obama administration to address Gates’ prescient concern and to develop a clearer policy foundation for America’s global military ‘lender of last resort’ role.

America is woefully underfunded in infrastructure spending and many other social needs. A big question is whether it can also be the global military “lender of last resort” and still maintain its own house. The military contracting industry in America does create a lot of jobs, but in essence it also gives the benefits away free to its allies. Times must change. America must either charge for these services or understand more clearly what we gain from continued military involvement overseas.

Read more …

Aug 272015
 
 August 27, 2015  Posted by at 11:44 am Finance Tagged with: , , , , , , , , ,  3 Responses »
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Arthur Siegel Zoot suit, business district, Detroit, Michigan Feb 1942

US Stocks Surge, Snapping 6-Day Losing Streak (AP)
Worst Decline In World Trade In 6 Years (RT)
China Meltdown So Large That Losses Eclipsed BRICS Peers, Twice (Bloomberg)
The Stock Market Hasn’t Had a Selloff Like This One in Over 75 Years (BBG)
China’s Workers Abandon The City As Beijing Faces An Economic Storm (Guardian)
China’s Central Bank Won’t Do Beijing’s Dirty Work (Pesek)
China Is In A Serious Bind But This Is Not Yet A ‘Lehman’ Moment (AEP)
Capitalism Is Always And Fundamentally Unstable (Steve Keen)
The US Is Short on Options to Confront Next Crisis (Benchmark)
Stock Market Tumult Exposes Flaws in Modern Markets (WSJ)
China Remains a Key Commodities Player, Despite Waning Appetites (WSJ)
Oil Industry Needs to Find Half a Trillion Dollars to Survive (Bloomberg)
For Oil Producers Cash Is King; That’s Why They Just Can’t Stop Drilling (BBG)
Alberta’s Economy Heading Toward Contraction (Globe and Mail)
Yanis Varoufakis Pushes For Pan-European Network To Fight Austerity (ABC.au)
Tsipras Rules Out Coalition Partners, Says Varoufakis ‘Lost His Credibility’ (AP)
Greek Minister Says €5 Billion ATE Bank Scandal Is Biggest Of Its Type (Kath.)
Hedge Funds Set To Bank Millions Short Selling In London Share Slump (Guardian)
Mass Migration: What Is Driving the Balkan Exodus? (Spiegel)
Hungary Scrambles To Confront Migrant Influx, Merkel Heckled (Reuters)

Debt rattle.

US Stocks Surge, Snapping 6-Day Losing Streak (AP)

The Dow Jones industrial average rocketed more than 600 points Wednesday, its biggest gain in seven years, snapping a six-day losing streak that had Americans nervously checking their investment balances. While the surge came as a relief to many, Wall Street professionals warned that more rough days lie ahead, in part because of weakness in China, where signs of an economic slowdown triggered the sell-off that has shaken global markets over the past week. Heading into Wednesday, the three major U.S. stock indexes had dropped six days in a row, the longest slide in more than three years. The Dow lost about 1,900 points over that period, and more than $2 trillion in corporate value was wiped out. On Tuesday, a daylong rally collapsed in the final minutes of trading.

On Wednesday, the market opened strong again, and the question all day was whether the rally would hold. It did, and picked up speed just before the closing bell. The Dow vaulted 619.07 points, or 4%, to 16,285.51. It was the Dow’s third-biggest point gain of all time and its largest since Oct. 28, 2008, when it soared 889 points. The Standard & Poor’s 500 index, a much broader measure of the stock market, gained 72.90 points, or 3.9%, to 1,940.51. In %age terms, it was the best day for the S&P 500 in nearly four years. The Nasdaq composite rose 191.05 points, or 4.2%, to 4,697.54. Analysts said investors apparently saw the big sell-off as an opportunity to go bargain-hunting and buy low. “That always leads to a bounce or spike in the market,” said Quincy Krosby, market strategist for Prudential Financial.

Read more …

“Meanwhile, the IMF predicted the world economy would grow 3.5% this year…”

Worst Decline In World Trade In 6 Years (RT)

The first half of 2015 has seen the worst decline in world trade since the 2009 crisis, according to World Trade Monitor. The data could imply that globalization has reached its peak. In the first quarter of 2015, the volume of world trade declined by 1.5%, while the second quarter saw a 0.5% contraction (1.1% growth in annual terms), which makes the first six months of the year the worst since the 2009 collapse. Global trade won back 2% in June, but the authors of the research, the Netherlands Bureau for Economic Policy Analysis, warned that the monthly numbers were volatile and suggested looking at the long-term figures.

“We have had a miserable first six months of 2015,” chief economist of the WTO Robert Koopman told the FT. The organization had predicted trade would grow 3.3% this year, but is likely to downgrade the estimate in the coming weeks. According to Koopman, the downturn in world trade reflects the delay in the recovery of the European economy and the economic slowdown in China. “There’s an adjustment going on in the global economy and trade is a place where that adjustment becomes pretty visible,” added the economist. However, despite the fact that globalization has indeed reached its peak, there are no signs that it will decline, said Koopman. Meanwhile, the IMF predicted the world economy would grow 3.5% this year.

Read more …

$5 trillion.

China Meltdown So Large That Losses Eclipsed BRICS Peers, Twice (Bloomberg)

Take the combined size of all stocks traded in Brazil, Russia, India and South Africa, multiply by two, and you’ll get a sense of how much China’s market value has slumped since the meltdown started. Shanghai-listed equities erased $5 trillion since reaching a seven-year high in June, half their value, as margin traders closed out bullish bets and concern deepened that valuations were unjustified by the weak economic outlook. The four other countries in the BRICS universe have a combined market capitalization of $2.8 trillion, according to data compiled by Bloomberg. China has accounted for 41% of equity declines worldwide since mid-June, with the scale of the drop also exceeding the entire size of the Japanese stock market.

Losses accelerated following the shock yuan devaluation on Aug. 11 as investors took the step as a sign the government is more worried about the pace of the economic slowdown than previously thought. That, in turn, sent convulsions through global markets, particularly hurting countries that rely heavily on China as a destination for their exports of vegetables, minerals and fuel, including Brazil, Russia and South Africa. The Shanghai Composite Index remains 33% higher in the past 12 months. “China has been the single most important source of growth in the world for several years, hence such a sharp slowdown has a profound impact on trade,” Nathan Griffiths at NN Investment Partners in The Hague said by e-mail. Stock-market volatility on the “downside is much more important than the move on the upside for broader markets,” he said.

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By one metric…

The Stock Market Hasn’t Had a Selloff Like This One in Over 75 Years (BBG)

By one metric, investors would have to go back 75 years to find the last time the S&P 500’s losses were this abrupt. Bespoke Investment Group observed that the S&P 500 has closed more than four standard deviations below its 50-day moving average for the third consecutive session. That’s only the second time this has happened in the history of the index. May 15, 1940, marked the end of the last three-session period in which this occurred. This string of sizable deviations from the 50-day moving average is a testament to just how severe recent losses have been compared to the index’s recent range. “Not even the crash of 1987 got this oversold relative to trend,” writes Bespoke.

The money management and research firm produced a pair of analogue charts showing what’s in store if the S&P 500 mimics the price action seen in mid-1940. Overlaying the axes gives the impression that the worst of the pain is behind us, and a market bottom isn’t too far off. However, indexing the S&P 500 to five sessions prior to the tumult shows that a replication of the mid-1940 plunge could see equities run much further to the downside and into a bear market. If it tracked the 1940 trajectory, the S&P 500 would hit a low of 1,556 in relatively short order. But Bespoke doesn’t think stocks are fated to repeat that selloff.

“There is nothing, nothing, we have seen – Chinese fears, positioning, valuation, or any other factor – suggests to us that we are headed to 1556,” the analysts write. “More likely, in our view, is something along the lines of the top analogue; we doubt the bottom is in, but see it unlikely we enter a bear market and a true stock market crash.”

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Back to the country.

China’s Workers Abandon The City As Beijing Faces An Economic Storm (Guardian)

Liu Weiqin swapped rural poverty for life on the dusty fringes of China’s capital eight years ago hoping – like millions of other migrants – for a better future. On Thursday she will board a bus with her two young children and abandon her adopted home. “There’s no business,” complained the 36-year-old, who built a thriving junkyard in this dilapidated recycling village only to watch it crumble this year as plummeting scrap prices bankrupted her family. “My husband will stick around a bit longer to see if there is any more work to be found. I’m taking the kids.” Weeks of stock market turmoil have focused the world’s attention on the health of the Chinese economy and raised doubts over Beijing’s ability to avert a potentially disastrous economic crisis, both at home and aboard.

The financial upheaval has been so severe it has even put a question mark over the future of premier Li Keqiang, who took office less than three years ago. Following a stock market rout dubbed China’s “Black Monday”, government-controlled media have rejected the increasingly desolate readings of its economy this week. “The long-term prediction for China’s economy still remains rosy and Beijing has the will and means to avert a financial crisis,” Xinhua, the official news agency, claimed in an editorial. Meanwhile Li told the state TV channel CCTVthat “the overall stability of the Chinese economy has not changed”. The evidence in places such as Nanqijia – a hardscrabble migrant community of recyclers around 45 minutes’ drive from Tiananmen Square – points in the opposite direction.

“It’s the worst we’ve seen it. It’s even worse than 2008,” said Liu Weiqin, who like most of the village’s residents hails from Xinyang in south-eastern Henan province, one of China’s most deprived corners. “When things were good we could earn 10,000 yuan [£1,000] a month. But I’ve lost around 200,000 yuan since last year,” added Liu, who was preparing to leave her cramped redbrick shack for a 10-hour coach journey back to her family home with her eight-year-old son, Hao Hao, and five-year-old daughter, Han Han.

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Trouble in Utopia?

China’s Central Bank Won’t Do Beijing’s Dirty Work (Pesek)

China’s Zhou Xiaochuan is either the smartest or most reckless central banker in the world. Even after its fifth rate cut in nine months on Tuesday, the People’s Bank of China is running a monetary policy that’s too tight for an economy on the brink. The PBOC is grappling with weakening growth, excessive debt and a plunging equity market that’s wreaking havoc on household wealth, corporate profits and business confidence. So why is Zhou still only offering monetary-baby steps over the shock-and-awe recently favored by Bank of Japan Governor Haruhiko Kuroda? It’s partly because he wants to prevent China’s central bank autonomy from being reduced to a hollow cliché.

Zhou’s team – well aware that he has a control-obsessed Communist Party looking over his shoulder – wants to make sure President Xi Jinping does his part to restore China’s economy. We’ll know soon enough whether Zhou is being reckless. Many commentators have argued the PBOC should initiate quantitative easing. After all, China’s overcapacity and debt levels – the country’s local governments alone owe more than Germany’s annual gross domestic product – caution against a new round of fiscal stimulus. If the data on China’s economic fundamentals and Shanghai stocks cascade lower in the months ahead, Zhou might have some explaining to do. But, for now, his show of independence is a silver lining amid the ongoing turmoil.

Zhou is an economic modernizer without peer in today’s Beijing, a disciple of former premier Zhu Rongji, China’s most-important reformer since the pioneering Communist Party chairman Deng Xiaoping. Zhou’s top goal has been to get the yuan added to the International Monetary Fund’s special drawing rights program. But unlike other Chinese policy makers, who want to leverage that status to increase the country’s global clout, he wants to use it to spur further economic reforms. He knows that once the yuan is recognized as a reserve currency, Beijing will have no choice but to adhere to global economic norms.

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Ambrose can’t seem to be able to make up his mind these days. Make it a Minsky moment then.

China Is In A Serious Bind But This Is Not Yet A ‘Lehman’ Moment (AEP)

The European and American economies are at this point like 747 jumbo jets flying smoothly into stiff headwinds at 37,000 ft. Such craft do not normally fall out of the sky just like that. The great unknown is China. Some of us never believed in the first place that the Communist Party can perform miracles, or that China is necessarily destined for economic hegemony this century. We have long argued that the post-2009 credit blitz has been unprecedented in any major country in history. Loans have increased from $9 trillion to $27 trillion in six years. The extra debt alone is greater than the combined banking systems of the US and Japan, and its potency is dying as the output gained from each yuan of fresh credit drops from 80pc to nearer 25pc.

We argued – like premier Li Keqiang, our lonely hero in the Politburo – that the country is hurtling straight into the middle income trap unless it ditches Deng Xiaoping’s obsolete catch-up model in time, both by weaning itself off investment-led growth and by relinquinshing the Party grip on Chinese society. We expected trouble. Yet the crumbling credibility of China’s leaders this year is disturbing to watch. They have made serial errors. They sat on their hands as real one-year borrowing costs rocketed to 5pc. They botched the local government reform plan over the winter, precipitating a four-month fiscal crunch (spending fell 19.9pc in January) that would bring any country to its knees. They deliberately stoked a stock mania in Shanghai and Shenzhen, thinking it would reflate the economy by means of equity rather than debt.

They then mobilized the state’s coercive powers to stop it collapsing, only to fail. Finally, they abandoned China’s dollar peg and switched to a managed float before the economy had pulled out of recession (my term, not theirs), causing much of the world and many of its own citizens to conclude that Beijing is deliberately trying to drive down the yuan. It is this that precipitated the August storm. It is has the potential to turn dangerous. Nomura says capital flight reached almost $200bn in early July. Reports are circulating that it may be much higher. The central bank (PBOC) is burning through foreign reserves to defend the currency. This is causing a liquidity squeeze and lowering the monetary multiplier, yet the PBOC cannot easily slash rates to support the economy without inviting further outflows. Hence the timid 50 point cut in the reserve requirement ratio on Tuesday.

We are already seeing signs of disguised capital controls. Beijing has invoked anti-terror laws to investigate anybody suspected of smuggling money out of the country. Police raids are under way in Macau, the casino centre used to launder capital flight. Beijing has lifted the interest rate cap on long-term deposit accounts to try to entice savings to stay within China. These steps may at least slow the exodus of money. My own view – with low conviction, as they say in the hedge fund world – is that China will weather this immediate storm, though with difficulty.

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That is Minsky.

Capitalism Is Always And Fundamentally Unstable (Steve Keen)

Minsky’s view that capitalism is fundamentally unstable can be derived from a simple, dynamic view of capitalism: without bankruptcy or government intervention, a pure free market capitalist economy will collapse into a private debt black hole. The political implications of this are (a) that capitalism needs debt write-offs to survive, and (b) that government money creation is needed to avoid economic collapse. This is a huge political shift from today’s politics where the rights of creditors are enforced to the detriment of debtors, and where Neoliberalism has attempted to reduce the size of the public sector.

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Used all the tricks in the book.

The US Is Short on Options to Confront Next Crisis (Benchmark)

Stock market and commodity price declines are sweeping the globe, raising a question: If the U.S. economy lands in another hole, what tools does it have to dig itself out? Perhaps not many, or at least not as many as before the 2008 meltdown. U.S. debt stands at 74% of gross domestic product, compared with 35% in 2007, based on a Congressional Budget Office report released Tuesday. That burden is expected to grow further in coming years, limiting government options for additional fiscal stimulus in the form of spending or lower taxes. While the U.S. could follow in the footsteps of Japan, Ireland, Italy or Greece, which have racked up even higher debt-to-GDP levels, heftier deficits would be a hard political sell.

After all, Congress has been loathe to borrow, curbing spending through “sequester” limits and pushing the nation to the brink of default in 2011 amid disputes over a debt-limit extension. In recent years, the Federal Reserve has provided the stimulus that austerity-minded fiscal policy makers didn’t. The central bank has held interest rates near zero since 2008 and carried out three massive asset purchase programs to boost the economy. Now, cutting interest rates wouldn’t be an option in the face of a big downturn. That means the Fed would need to once again turn to unconventional steps such as further asset purchases or increased forward guidance. They’ve done it before, so it’s hard to make the case that they wouldn’t do it again, but it does mean that a crucial option — interest rates — is missing from their toolbox.

Partly for that reason, the Bank for International Settlements has warned that still-low rates around the world pose a looming economic risk. “Restoring more normal conditions will also be essential for facing the next recession, which will no doubt materialise at some point,” according to an annual report from the organization of central banks. “Of what use is a gun with no bullets left?”

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“..Monday’s issues are likely to lead to changes in how markets operate at times of uncertainty..” Ha ha, want to bet?

Stock Market Tumult Exposes Flaws in Modern Markets (WSJ)

Monday’s mayhem exposed significant flaws in the new architecture of Wall Street, where stock-linked funds—as much as shares themselves—now trade en masse on U.S. markets. Many traders reported difficulty buying and selling exchange-traded funds, a popular investment in which baskets of stocks and other assets are packaged to facilitate easy trading. Dozens of ETFs traded at sharp discounts to their net asset value—or their components’ worth—leading to outsize losses for investors who entered sell orders at the depth of the panic. Products built to provide insurance for investors came up short. As a result of trading halts in futures tied to the S&P 500 index, it was difficult for investors to get consistent prices on contracts linked to them that offer insurance against S&P 500 declines.

Elsewhere, the value of the most widely tracked Wall Street gauge of investor anxiety, the CBOE Volatility Index, or VIX, wasn’t published until almost 10 a.m. Monday, half an hour after stock trading began and after the Dow Jones Industrial Average had already posted its largest-ever intraday point decline. That made it difficult for investors to easily gauge the fear in the market. “ETFs have democratized investing,” said David Mazza, head of ETF research at State Street Global Advisors, a major ETF provider. But he and others added that ETFs don’t prevent investors from suffering losses if they buy or sell when the market is under stress. Analysts said that, while losses were inevitable for some investors amid the turmoil, and unruly trading is hardly unheard of on late-summer days, Monday’s issues are likely to lead to changes in how markets operate at times of uncertainty.

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The WSJ tries for a positive spin here, but what this really means is commodities are in for foul weather.

China Remains a Key Commodities Player, Despite Waning Appetites (WSJ)

The fear that China’s appetite for commodities, from copper to coal, is falling after a decade of breakneck growth has sent prices tumbling, but the country’s sheer scale in these markets means that China will continue to shape them in the long term, even if at a slower speed. China now buys about an eighth of the world’s oil, a quarter of its gold, almost a third of its cotton and up to half of all the major base metals. Its buying power has made the country integral to global commodities trading, influencing everything from prices to the hours traders work. While analysts predict a slowdown in the growth of Chinese commodity demand, they believe the country’s clout in the market isn’t likely to wane.

Commodities have fallen sharply in recent days, extending a summer of declines, amid concerns that a slowdown in China’s economic growth will sap the demand that drove markets through more than a decade of gains. China’s voracious consumption amid double-digit annual economic growth also encouraged a glut of new supply, from fertilizers to gold. Earlier this week, oil fell to its lowest levels in over six years. Industrial metals, such as copper and aluminum, have lost about 20% of their value this year, as has iron ore.

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ha ha ha

Oil Industry Needs to Find Half a Trillion Dollars to Survive (Bloomberg)

At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it. The number of oil and gas company bonds with yields of 10% or more, a sign of distress, tripled in the past year, leaving 168 firms in North America, Europe and Asia holding this debt, data compiled by Bloomberg show. The ratio of net debt to earnings is the highest in two decades. If oil stays at about $40 a barrel, the shakeout could be profound, according to Kimberley Wood at Norton Rose Fulbright in London. “The look and shape of the oil industry would likely change over the next five to 10 years as companies emerge from this,” Wood said.

“If oil prices stay at these levels, the number of bankruptcies and distress deals will undoubtedly increase.” Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. A total of about $550 billion in bonds and loans are due for repayment over the next five years. U.S. drillers account for 20% of the debt due in 2015, Chinese companies rank second with 12% and U.K. producers represent 9%. In the U.S., the number of bonds yielding greater than 10% has increased more than fourfold to 80 over the past year, according to data compiled by Bloomberg. 26 European oil companies have bonds in that category..

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Hamster and treadmill.

For Oil Producers Cash Is King; That’s Why They Just Can’t Stop Drilling (BBG)

Investors sent a surprising message to U.S. shale producers as crude fell almost 20% in August: keep calm and drill on. While most oil stocks have fallen sharply this month, the least affected by the slump share one thing in common: they don’t plan to slow down, even though a glut of supply is forcing prices down. Cimarex Energy jumped more than 8% in two days after executives said Aug. 5 that their rig count would more than double next year. Pioneer Natural Resources Co. rallied for three days when it disclosed a similar increase. Shareholders continue to favor growth over returns, helping explain why companies that form the engine of U.S. oil – the frackers behind the boom – aren’t slowing down enough to rebalance the market.

U.S. production has remained high, frustrating OPEC’s strategy of maintaining market share and enlarging a glut that has pushed oil below $40 a barrel. “These companies have always been rewarded for growth,” according to Manuj Nikhanj, head of energy research for ITG Investment Research in Calgary. Now though, “the balance sheets of this sector are so challenged that investors are going to have to look at other factors,” he said. Output from 58 shale producers rose 19% in the past year, according to data compiled by Bloomberg. Despite cutting spending by $21.7 billion, the group pumped 4% more in the second quarter than in the last three months of 2014.

That’s buoyed overall U.S. output, which has only drifted lower after peaking at a four-decade high in June. The government estimates production will slide 8% from the second quarter of this year to the third quarter of 2016. OPEC has been pumping above its target for more than a year. The oversupply may worsen if Iran is allowed to boost exports should it strike a deal with the U.S. and five other world powers to curb the Islamic Republic’s nuclear program.

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“The province’s Wildrose opposition has noted that a barrel of Alberta’s oil is now cheaper than a case of beer.”

Alberta’s Economy Heading Toward Contraction (Globe and Mail)

Faced with a collapse in energy prices, widespread drought, forest fires and the uncertainty of an untested government, the engine that drove much of Canada’s growth over the past decade has seized. Alberta’s economy is expected to contract this year. “I think it’s inevitable that Alberta will be in a contraction this year,” said Todd Hirsch, the chief economist for ATB Financial. “In 2016, I’m still optimistic we can squeeze out a very modest recovery. But this province won’t feel like it normally does until 2017 at the earliest.” Apart from a devastated energy sector, the provincial government has declared a provincewide agricultural disaster. After weeks of near-record drought, fields of parched grain can be found across much of Alberta.

The Agriculture Financial Services Corp. now expects to pay out as much as $1-billion to struggling farmers. Although most of Alberta’s farmers have crop insurance, the provincial agency will use the money to ensure the speedy compensation of farmers for lost crops and revenue. At the same time, dry weather gave rise to an early fire season in Alberta that has burnt 493,000 hectares across central and northern areas of the province – a burn area nearly twice the five-year average. A final price tag for the 1,646 fires seen across Alberta so far has yet to be determined. The struggling economy will have a huge effect on the government’s finances.

The provincial budget deficit could be the largest in nearly two decades, topping $8-billion if oil prices remain low, according to John Rose, the City of Edmonton’s chief economist. That would complicate Premier Rachel Notley’s campaign promise to increase spending on health and education while balancing the books by 2018. “It’s turning out worse than I expected,” said Mr. Rose, who warned of a significant slowdown in the provincial economy last December. “My forecast for 2015 was predicated on oil holding around $60 a barrel through the year. Things have gone awry.”

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Can’t reform EU, Yanis.

Yanis Varoufakis Pushes For Pan-European Network To Fight Austerity (ABC.au)

As far as Yanis Varoufakis is concerned, the Greek election campaign will be ‘sad and fruitless’. He tells Late Night Live why he won’t be running and why he is instead putting his energy into political action on a European level. When Greek prime minister Alexis Tsipras suddenly resigned last week, calling for fresh elections, his former finance minister Yanis Varoufakis was about to set off for France. His destination was the Fête de la Rose—a political event organised by the French Socialist Party, held annually in the tiny town of Frangy-en-Bresse, not far from the Swiss border. As rain poured down on the gathering, Varoufakis opened his speech with words familiar to any student of Marxist politics: ‘A spectre is haunting Europe.’

In Varoufakis’s adaptation, the spectre is that of democracy, and the powers of old Europe are as opposed to democracy in 2015 as they were to communism in 1848. For Varoufakis, the events of this year are an ‘Athens spring’ that was crushed by the banks after the Greek public’s vote against austerity in July. But as he explained to Late Night Live, he won’t be running for Greek parliament in the September elections, as he no longer believes in what Syriza and its leader, Tsipras, are doing. ‘The party that I served and the leader that I served has decided to change course completely and to espouse an economic policy that makes absolutely no sense, which was imposed upon us,’ he says.

‘I don’t believe that we should have signed up to it, simply because within a few months the ship is going to hit the rocks again. And we don’t have the right to stand in front of our courageous people who voted no against this program, and propose to them that we implement it, given that we know that it cannot be implemented.’ He has sympathy for a grouping of rebel MPs known as Popular Unity, but fundamentally disagrees with their ‘isolationist’ stance of desiring a return to the drachma. Instead, he says, his focus has turned to politics at the European level. ‘I don’t believe this parliament that will emerge from the coming election can ever hope to establish a majority in favour of a rational economic program and a progressive one,’ he says.

‘Instead of becoming engaged in an election campaign which in my mind is quite sad and fruitless, I’m going to be remain politically active—maybe more active than I have been so far—at the European level, trying to establish a European network. ‘National parties forming flimsy alliances within a Europe that operates like a bloc, like a macroeconomy, in its own interests—that model doesn’t work anymore. I think we should try to aim for a European network that at some point evolves into a pan-European party.’

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“(Varoufakis) was talking and they paid no attention to him. They had switched off..”

Tsipras Rules Out Coalition Partners, Says Varoufakis ‘Lost His Credibility’ (AP)

Greece’s prime minister on Wednesday raised the political stakes ahead of next month’s early national election, saying he will not enter a coalition with the main center-right and centrist opposition parties even if he needs their backing to govern. Alexis Tsipras resigned last week, barely seven months into his four-year mandate, when his bailout-dependent country received a new rescue loan that saved it from a looming bankruptcy and exit from the euro currency. He is seeking a stronger mandate, after his radical left-led coalition effectively lost its parliamentary majority when dozens of his own hardline left lawmakers refused to back new austerity measures demanded for the loan — which parliament approved with the backing of pro-European opposition parties.

Tsipras is widely expected to win the snap election, which will most likely be held Sept. 20, but it is unclear whether he will secure enough seats in parliament to govern alone. In an interview with private Alpha TV Wednesday, Tsipras ruled out a coalition with the center-right main opposition New Democracy party, or the smaller centrist Potami and PASOK parties. “I will not become prime minister in a coalition government with (New Democracy, PASOK or Potami),” he said. “I think that all three parties essentially express the old political system.” Before the election date is set, main opposition parties must complete the formal process of trying to form a national unity government. That procedure — doomed due to the parties’ disagreements — is expected to end Thursday.

Tsipras’ disaffected former comrades are angry at his policy U-turn to secure the international loans, as he was elected Jan. 25 on pledges to scrap creditor-demanded income cuts and tax hikes. They have formed the rebel group Popular Unity, now Greece’s third-largest party. Deepening the rift in Syriza, 53 members of the 201-strong central committee — the main party organ — announced their resignations from the party Wednesday, as they are switching to Popular Unity. Tsipras has argued that he was forced to accept creditors’ terms to keep Greece in the euro, and said that if he secures a slender majority in the election he will seek a coalition with his current partner, the small right wing populist Independent Greeks.

[..] In his interview, Tsipras said he accepted the bailout deal to avoid having to deal with a Greek bank collapse “and, possibly, civil strife” if the country was forced out of the euro. Tsipras also explained why, shortly before the agreement, he sacked his flamboyant finance minister, Yanis Varoufakis, who alienated Greece’s creditors with his aggressive talk and delaying tactics. Tsipras said that in a top-level June 25 meeting he and Varoufakis attended with the IMF, ECB and EC heads, “(Varoufakis) was talking and they paid no attention to him. They had switched off,” Tsipras said. “He had lost his credibility with his interlocutors.”

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Until the next one.

Greek Minister Says €5 Billion ATE Bank Scandal Is Biggest Of Its Type (Kath.)

Minister of State for Combating Corruption Panayiotis Nikoloudis on Wednesday described the illegal loans provided by the now-defunct Agricultural Bank of Greece (or ATEbank) between 2000 and 2012, which he is responsible for investigating, as the “biggest scandal since the modern Greek state was founded.” “We are talking about €5 billion at least… which dwarfs the infamous [Giorgos] Koskotas scandal involving the Bank of Crete [in the late 1980s], which ran to the equivalent of €60 million.”

The results of a preliminary investigation, which were made public in July, indicated that ATEbank was used to siphon some €5 billion to supporters of previous governments as part of a patron-client relationship. Prosecutors are investigating more than 1,300 loans that were issued without the necessary guarantees being demanded by the bank. ATEbank was absorbed by Piraeus Bank in 2013. Nikoloudis said that the loans were not given randomly, but to specific people, including “media owners, select businessmen and agricultural cooperatives.”

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Shorting Sainsbury.

Hedge Funds Set To Bank Millions Short Selling In London Share Slump (Guardian)

Hedge funds are set to bank tens of millions of pounds from the slump in share prices in London, having bet almost £18bn that the FTSE 100 would fall. The funds making the bets include Lansdowne Partners, which is run by George Osborne’s best man, Peter Davies, and Odey Asset Management, which is led by Crispin Odey – who made millions by predicting the credit crisis and earlier this year said the world was heading for a downturn “likely to be remembered in 100 years”. Short selling, effectively betting that share prices will fall, involves borrowing shares in a company and selling them with a view to buying them back at a lower price. The hedge fund makes a profit by banking the difference , as long as the shares do in fact fall.

As concerns over the slowing Chinese economy have grown, traders have increasingly bet that the fallout would be felt in blue-chip shares in London. The average%age of FTSE 100 company shares out on loan to short sellers has risen from 1.2% a year ago to 1.75%. The value of the short positions hedge funds have taken in FTSE 100 companies is £17.8bn, according to research by Markit. By the close of trading on Monday the FTSE 100 had fallen for 10 days in a row, sending it 17% down from its record high in April, before bouncing back by 3% on Tuesday. The biggest short positions are in Wm Morrison and J Sainsbury, with 16.4% of Morrisons shares out on loan, and 16.2% of Sainsbury’s shares. Traders have bet on the two supermarkets struggling further in the face of fierce competition from the discounters Aldi and Lidl.

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Hopelessness is.

Mass Migration: What Is Driving the Balkan Exodus? (Spiegel)

When Visar Krasniqi reached Berlin and saw the famous image on Bernauer Strasse – the one of the soldier jumping over barbed wire into the West — he knew he had arrived. He had entered a different world, one that he wanted to become a part of. What he didn’t yet know was that his dream would come to an end 11 months later, on Oct. 5, 2015. By then, he has to leave, as stipulated in the temporary residence permit he received. Krasniqi is not a war refugee, nor was he persecuted back home. In fact, he has nothing to fear in his native Kosovo. He says that he ran away from something he considers to be even worse than rockets and Kalashnikovs: hopelessness. Before he left, he promised his sick mother in Pristina that he would become an architect, and he promised his fiancée that they would have a good life together.

“I’m a nobody where I come from, but I want to be somebody.” But it is difficult to be somebody in Kosovo, unless you have influence or are part of the mafia, which is often the same thing. Taken together, the wealth of all parliamentarians in Kosovo is such that each of them could be a millionaire. But Krasniqi works seven days a week as a bartender, and earns just €200 ($220) a month. But a lack of prospects is not a recognized reason for asylum, which is why Krasniqi’s application was initially denied. The 30,000 Kosovars who have applied for asylum in Germany since the beginning of the year are in similar positions. And the Kosovars are not the only ones. This year, the country has seen the arrival of 5,514 Macedonians, 11,642 Serbians, 29,353 Albanians and 2,425 Montenegrins. Of the 196,000 people who had filed an initial application for asylum in Germany by the end of July, 42% are from the former Yugoslavia, a region now known as the Western Balkans.

The exodus shows the wounds of the Balkan wars have not yet healed. Slovenia and Croatia are now members of the European Union, but Kosovo, which split from Serbia and became prematurely independent in 2008, carves out a pariah existence. Serbia is heavily burdened with the unresolved Kosovo question. The political system in Bosnia-Hercegovina is on the brink of collapse, 20 years after the end of the war there. And Macedonia, long the post-Yugoslavia model nation, has spent two decades in the waiting rooms of the EU and NATO, thanks to Greek pressure in response to a dispute over the country’s name. The consequences are many: a lack of investment, failing social welfare systems, corruption, organized crime, high unemployment, poverty, frustration and rage.

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“..helicopters, mounted police and dogs..”

Hungary Scrambles To Confront Migrant Influx, Merkel Heckled (Reuters)

Hungary made plans on Wednesday to reinforce its southern border with helicopters, mounted police and dogs, and was also considering using the army as record numbers of migrants, many of them Syrian refugees, passed through coils of razor-wire into Europe. In Germany, which expects to receive 800,000 of them this year, Chancellor Angela Merkel was heckled by dozens of protesters as she visited an eastern town where violent anti-refugee protests erupted at the weekend. The surge in migrants seeking refuge from conflict or poverty in the Middle East, Africa and Asia has confronted Europe with its worst refugee crisis since World War Two, stirring social tensions and testing the resources and solidarity of the 28-nation European Union.

A record 2,533 mainly Syrians, Afghans and Pakistanis crossed from Serbia into EU member Hungary on Tuesday, climbing over or squirreling under a razor-wire barrier into the hands of an over-stretched police force that struggled to fingerprint and process them. Authorities said over 140,000 had been caught entering so far this year. Unrest flared briefly at a crowded reception center in the border region of Roszke, with tear gas fired by police. Another 1,300 were detained on Wednesday morning. More will have passed unnoticed, walking through gaps in a border fence being built by Hungary in what critics say is a futile attempt to keep them out. They packed a train station in the capital, Budapest, hundreds of men, women and children sleeping or sitting on the floor in a designated “transit zone” for migrants.

Almost all hope to reach the more affluent countries of northern and western Europe such as Germany and Sweden. Visiting the eastern German town of Heidenau, where violence broke out during weekend protests by far-right militants against the arrival of around 250 refugees, Merkel said xenophobia would not be tolerated. About 50 protesters booed, whistled and waved signs that read “Volksverraeter” (traitor), a slogan adopted by the anti-Islam PEGIDA movement earlier this year. “There is no tolerance for those people who question the dignity of others, no tolerance for those who are not willing to help where legal and human help is required,” Merkel told reporters and local people. “The more people who make that clear … the stronger we will be.”

Read more …

Jun 052015
 
 June 5, 2015  Posted by at 12:49 pm Finance Tagged with: , , , , , , , , ,  1 Response »
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Dorothea Lange Farm boy at main drugstore, Medford, Oregon 1939

Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.

What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.

Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.

That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.

Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.

Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.

But the lack of scrutiny should still puzzle. How central bankers managed to pull off the move from admitting they had no idea what they were doing, to being seen as virtually unquestioned maestros, rulers of, if not the world, then surely the economy. Is that all that hard, though, if and when you can push trillions of dollars into an economy?

Isn’t that something your aunt Edna could do just as well? The main difference between your aunt and Janet Yellen may well be that Yellen knows who to hand all that money to: Wall Street. Aunt Edna might have some reservations about that. Other than that, how could we possibly tell them apart, other than from the language they use?

The entire thing is a charade based on perception and propaganda. Politicians, bankers, media, the lot of them have a vested interest in making you think things are improving, and will continue to do so. And they are the only ones who actually get through to you, other than a bunch of websites such as The Automatic Earth.

But for every single person who reads our point of view, there are at least 1000 who read or view or hear Maro Draghi or Janet Yellen’s. That in itself doesn’t make any of the two more true, but it does lend one more credibility.

Draghi this week warned of increasing volatility in the markets. He didn’t mention that he himself created this volatility with his latest QE scheme. Nor did anyone else.

And sure enough, bond markets all over the world started a sequence of violent moves. Many blame this on illiquidity. We would say, instead, that it’s a natural consequence of the infusion of fake zombie liquidity and ZIRP rates.

The longer you fake it, the more the perception will grow that you can’t keep up the illusion, that you’re going to be found out. Ultra low rates may be useful for a short period of time, but if they last for many years (fake stability) they will themselves create the instability Minsky talked about.

And since we’re very much still in uncharted territory even if no-one talks about it, that instability will take on forms that are uncharted too. And leave Draghi and Yellen caught like deer in the headlights with their pants down their ankles.

The best definition perhaps came from Jim Bianco, president of Bianco Research in Chicago, who told Bloomberg: “You want to shove rates down to zero, people are going to make big bets because they don’t think it can last; Every move becomes a massive short squeeze or an epic collapse – which is what we seem to be in the middle of right now.”

With long term ultra low rates, investors sense less volatility, which means they want to increase their holdings. As Tyler Durden put it: ‘investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This is how QE increases the likelihood of VaR shocks.’

QE+ZIRP have many perverse consequences. That is inevitable, because they are all fake from beginning to end. They create a huge increase in inequality, which hampers a recovery instead of aiding it. They are deflationary.

They distort asset values, blowing up prices for stocks and bonds and houses, while crushing the disposable incomes in the real economy that are the no. 1 dead certain indispensable element of a recovery.

You would think that the central bankers look at global bond markets today, see the swings and think ‘I better tone this down before it explodes in my face’. But don’t count on it.

They see themselves as masters of the universe, and besides, their paymasters are still making off like bandits. They will first have to be hit by the full brunt of Minsky’s insight, and then it’ll be too late.

Jun 042014
 
 June 4, 2014  Posted by at 4:07 pm Finance Tagged with: , , , ,  9 Responses »
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Barbara Wright Damaged Lives, Knoxville, Tenn., 1941

The Fed itself has stated many times over the past years that it intends to keep interest rates low. And now it starts complaining about low volatility. It looks like Yellen et al want to have their cake and eat it too. Perhaps they should have paid a little more attention to Hyman Minsky. Who long ago wrote – paraphrased – that if and when markets are perceived as being stable, it’s that very perception will make them unstable, because stability, i.e. low volatility, will drive investors into riskier asset purchases. The Fed’s manipulation-induced ultra-low rates have achieved just that, and now they’re surprised?

They are the ones who pushed down rates and threw trillions in QE on top of those low rates, and they had no idea that could create asset bubbles and increase risk-taking? Some of this stuff is simply wanting in credibility. But then, any and all manipulations of markets are poised to end badly, and certainly when the manipulators claim to represent, and function in, a free market.

Now they want more volatility, something that could be achieved by raising rates, especially if it’s done without all the forward guidance, but that would put the housing sector – or the housing bubble really – at risk, as well the “recovery” no-one is yet prepared to let go of. So all the Eccles occupants have left is words. They can try forward misguidance, leave the option open of surprise moves in oder to catch investors off guard. Sort of like a poker game.

The problem with that is no-one would believe that Yellen is a better poker player than even the average investor. Another problem is such intentional insecurity would hit the housing market, and stocks, anyway. You can coerce the most gullible American into buying a property if (s)he thinks rates will remain low, but not if you take away that belief.

The essence of what Minsky said is deceptively simple, and perhaps that’s why it’s so poorly understood: it’s not possible to “create” a stable market, because the very moment you try, you create its opposite, instability. Minsky’s financial instability hypothesis is quite clear, and frankly, if you don’t believe him you should first prove him wrong before trying to do what he says can’t be done anyway. If you feel you need to provide forward guidance because markets are weak and you think they’ll strengthen if you say you’ll keep rates at a certain level, you need to realize that the stability you’ve trying to convey will of necessity be self destructive.

Markets need uncertainty to be able to function properly. That’s what Minsky said. And trying to take away that uncertainty with forward guidance and trillions of dollars is a move that cannot end well. Markets are populated with people, and if you take uncertainty out of people’s individual lives, there’s no telling what they’ll do either, other than it’s certain they’ll increase the risks they take. And why not, if they think nothing can happen to them? If you’re young and feel invincible, why not down 20 shots of tequila in an hour or jump off a cliff? It’s a matter of risk assessment.

But we don’t need to get into psychology here, it’s very easy to see why Minsky was dead on. And it’s equally easy to understand why what follows from that is that the Fed, or any central bank or government, should stay away from manipulating the free markets they so favor but which are no longer free the moment the manipulation starts. If and when investors, be they pension fund managers or just people looking to buy their first home, are barred though central bank manipulation from discovering what an asset, any asset, is actually worth, and that’s where we find ourselves at the moment, a world of uncertainty is waiting for us. There is no other option.

We live in a control economy today, and we have no reasons to do that other than the Fed seeking to protect their banker friends from revealing their losses and their balance sheets. Because that’s what at stake here: if Yellen takes her fingers of the keyboard, and so does the Treasury, we’ll see a truth finding process that will wipe out some of the big players, and lots of small ones, like recent mortgage borrowers who‘ve bought in on artificially elevated price levels.

That will be hurtful, but we should understand that it’s inevitable that one day the truth shall be told. Maybe not about who shot JFK, but certainly about what your home is truly worth. The longer we postpone that day, the poorer our poor will be and the more of us will be among the poor. And that in turn will tear our societies apart, which won’t benefit anyone, not even those who escaped with the loot. Tell me again, what other purpose does the Fed serve but manipulating markets?

I don’t see any, and if I’m right, and so is Minsky – and he is – , we have ourselves a situation on our hands. I am certain there are people inside the Fed who have read, and understood, Minsky’s financial instability hypothesis. What kind of light does that shine on them, as they continue to be accessories to current policies?

Wait a minute. What about my recovery?

First Quarter Corporate Profits Tumble Most Since Lehman (Zero Hedge)

As SocGen’s Albert Edwards conveniently points out, during the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis’s (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!

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Look beyond the S&P and it’s like a bomb went off.

The Average Russell 2000 Stock Is Down 22% From Its Highs (Zero Hedge)

It’s hard to “fully commit” to this rally given “corroded internals,” warns FBN Securities technical analyst JC O’Hara in note. As we previously noted, new highs are extremely negatively divergent from the index strength, as are smarket money flows, but what has O’Hara “very disturbed” is the fact that the average Russell 2000 stock is over 22% below its 52-week highs. As O’Hara notes, investors are ignoring “technical signals that have historically forewarned” of a drop; they’re “jumping onto a plane where only one of the two engines is working. The plane does not necessarily have to crash but the risk of an accident is much higher when the plane is not firing on all cylinders.”

“Smart money” Flow is decidely the wrong way…

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I had no idea …

Fed Officials Growing Wary of Market Complacency (WSJ)

Federal Reserve officials are starting to wonder whether a tranquillity that has descended on financial markets is a sign that investors have become unafraid of the type of risk that could lead to bubbles and volatility. The Dow Jones Industrial Average, up a steady if unspectacular 1% since the beginning of the year, has consolidated big gains registered last year. The VIX, a measure of expected stock-market fluctuations based on options trading, has gone 74 straight weeks below its long-run average—a string of steadiness not seen since 2006 and 2007, before the financial crisis and recession. Moreover, the extra return that bond investors demand on investment-grade corporate debt over low-risk Treasury bonds, at one%age point, hasn’t been this low since July 2007. The lower this “spread,” the less risk-averse are bond investors.

The Fed’s growing worry—which could influence future interest rate decisions—is that if investors start taking undue risk it could lead to economic turbulence down the road. “Volatility in the markets is unusually low,” William Dudley, president of the Federal Reserve Bank of New York and a member of chairwoman Janet Yellen’s inner circle, said after a speech last week. “I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they’ll take more risk than really what’s appropriate.” One example of increased risk taking: Issuance of low-rated U.S. dollar-denominated junk bonds last year hit a record $366 billion, more than twice the level reached in the years before the 2008 financial crisis, according to financial-data provider Dealogic.

Richard Fisher, president of the Federal Reserve Bank of Dallas, added to the chorus of concern over complacency in an interview Tuesday. “Low volatility I don’t think is healthy,” he said. “This indicates to me a little bit too much complacency that [interest] rates are going to stay at abnormally low levels forever.” Many officials appear more inclined to talk about market risks than act to pre-empt them given the worry about cutting off a fragile recovery with early interest-rate hikes. Though risk-taking is on an upswing, they don’t see a buildup of serious threats to the broader stability of the financial system. Fed officials are expected at their June meeting to keep gradually scaling back their purchases of mortgage and Treasury bonds and stick to the plan to keep short-term interest rates near zero, where they have been since the height of the financial crisis in late 2008.

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Payment-in-kind notes are a silly risk raising “product” that offers a bit more yield in exchange for crazy risks: “We call it the yield-hunger games … ”

Sales Of Boom-Era ‘PIK’ Debt Soar (FT)

The sale of complex debt products popular in the pre-crisis boom years has soared in 2014 as investors have embraced riskier assets in exchange for higher returns. Issuance of US-marketed payment-in-kind notes – which give a company the option to pay lenders with more debt rather than cash in times of crisis – has almost doubled so far this year to reach $4.2bn, according to Dealogic. That is the highest amount since the same period of 2007, when a record $5.6bn in PIK notes were sold. The esoteric debt structures were a popular way for companies to finance big leverage buyouts during the boom era that defined the 2006-2007 credit bubble. More recently, investors in PIK notes have been encouraged by low corporate default rates and the chance to earn some additional returns.

“We call it the yield-hunger games,” said Matt Toms, head of US public fixed income for Voya Investment Management. “In this environment of very low yields and very low volatility, any extra yield that products such as these may offer already helps.” On average, PIK notes yield 50 basis points more than comparable high-yield bonds. Average yields on junk-rated bonds stood at 4.99 per cent on Tuesday, according to Barclays indices. A wave of junk-rated borrowers, including Wise Metals, a producer of metal containers, Infor, a software company and Interface Security have included PIK structures as part of new bond deals this year. This week, Jack Cooper, which transports new and pre-owned passenger vehicles, is expected to offer $150m in five-year senior PIK notes.

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I think we all know where QE goes. It’s not us.

Where $1 Of QE Goes: The Untold Story (Cyniconomics)

Sometimes the most interesting results are the ones you didn’t see coming. We recently picked through financial flows data looking for clues about where a dollar of quantitative easing (QE) ends up. For example, we wondered who parts with the bonds that find new homes on the Fed’s balance sheet. Dealers sometimes pass bonds straight from the Treasury to the Fed, but are they buying other QE-ready bonds mostly from households, pension funds, foreigners or other financial institutions? Also, can financial flows help us to guess at how much (if any) a dollar of QE adds to spending? We didn’t expect clear answers and were surprised to stumble across this:

Needless to say, the chart raises a bunch of new questions, such as: • Didn’t the Fed expect QE to complement other types of bank credit? • What do they think of data suggesting it only displaced private sources of credit? • Do they have any other explanations for the results in the chart? Unfortunately, our direct line to the Eccles Building isn’t working this week, which prevents us from answering these questions.

We’re left to form our own conclusions. What to make of the “argyle effect”? Our main takeaway is that the extra reserves created by QE aren’t so much an addition to bank balance sheets as a substitution. The addition story is the one we normally hear. It often leads to confused commentary, such as the mistaken ideas that banks “multiply up” or can “lend out” reserves. (We discussed these fallacies here.) But even without the confused commentary, the addition story doesn’t, well, add up. According to financial flows data, it’s more accurate to say that QE’s extra reserves merely replaced other forms of balance sheet expansion. That’s a substitution story. It’s consistent with the fact that banks can neutralize QE’s effects with derivatives overlays and other portfolio adjustments. They can rearrange exposures to mimic a balance sheet of equal size and risk that’s not stuffed with reserves. (See this related discussion by blogger Tyler Durden.)

Think of it this way: Your banker already knows how many slices of meat he wants in his sandwich. When the Fed shows up with a thick package straight from the deli, it saves him a trip of his own. He still makes the same sized sandwich, but it’s filled mostly by central bankers, and he adjusts it to his liking by varying the condiments. Now, the full picture is more complicated than that, mainly because reserves move from bank to bank. For example, data shows a large amount of QE reserves accumulating at U.S. offices of foreign banks, where they appear to be funded by foreign lenders. You can think of these reserves as a means of recycling America’s current account deficits back into U.S. dollar assets. In other words, QE seems to encourage foreigners to swap other types of dollar assets for reserves at the Fed, supporting the substitution story.

Read more …

Trading To Influence Gold Price Fix Was ‘Routine’ (FT)

When the UK’s financial regulator slapped a £26m fine on Barclays for lax controls related to the gold fix, it offered more ammunition to critics of the near-century-old benchmark. But it also gave precious metal traders in the City of London plenty to think about. While the Financial Conduct Authority says the case appears to be a one off – the work of a single trader – some market professionals have a different view. They claim the practice of nudging a tradeable benchmark in order to protect a “digital” derivatives contract – as a Barclays employee did – was routine in the industry. As a result, customers of Barclays and other market-making banks may be looking to see if they too have cause for complaint, according to one hedge fund manager active in the gold market.

“If I was at the FCA I would be looking at all banks trading digitals. This could be the tip of the iceberg – there’s a massive issue with exotic derivatives and barriers.” In the City, digital options are common in the precious metals sector and, especially, in forex trading. A payout is triggered if a predetermined price – or “barrier” – is breached at expiry date. If it is not, the option holder gets nothing. One former precious metals manager at a big investment bank says there has long been an understanding among market participants that sellers and buyers of digitals would try to protect their positions if the benchmark price and barrier were close together near expiry. “These are not Ma and Pa products, they are for super-professionals,” says the former manager. “There’s a fundamental belief that both parties can aggress or defend their book, and I would have expected my traders to do so.”

In the case of gold, this means trying to move the benchmark price, which is set during the twice daily auction “fixing” process run by four banks, including Barclays. That is what the Barclays trader, Daniel Plunkett, did on June 28, 2012. Exactly a year earlier, the bank had sold an options contract to an unnamed customer stating that if after 12 months the gold price were above $1,558.96 a troy ounce, the client would receive $3.9m. By placing a large sell order on the fix, Mr Plunkett pushed the gold price beneath the barrier, thus avoiding the payout. After the counterparty complained, the FCA became involved. Barclays paid the client the $3.9m, and was fined. Mr Plunkett was also fined – £95,600 – and banned from working in the City.

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Now that’s a surprise!

Over Half Of Americans Can’t Afford Their Houses (MarketWatch)

As the housing market slowly recovers, a majority of homeowners and renters are finding it hard to meet rising rents and mortgage payments, new research finds. Over half of Americans (52%) have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years, according to the “How Housing Matters Survey,” which was commissioned by the nonprofit John D. and Catherine T. MacArthur Foundation and carried out by Hart Research Associates. These sacrifices include getting a second job, deferring saving for retirement, cutting back on health care, running up credit card debt, or even moving to a less safe neighborhood or one with worse schools.

[..] … at least 15% of American homeowners (or residents of 78 counties across the country) were living in housing markets where the monthly mortgage payment on a median-priced home requires more than 30% of the monthly median household income – long considered the maximum for rent/mortgage repayments. Housing costs above that threshold are “unaffordable by historic standards,” says Daren Blomquist, vice president at real estate data firm RealtyTrac. In New York county/Manhattan, mortgage payments represent 77% of the median income and in San Francisco County represents 70%. Although mortgage rates are still quite low, down payments, poor credit and tighter lending standards remain three of the biggest hurdles for buying a home, especially among young people, Blomquist says.

“The slow jobs recovery for young adults has made it harder for them to save and to get a mortgage.” Some 84% of young people are delaying major life decisions due to the poor economy, according to a 2013 survey by Generation Opportunity, a nonprofit think tank based in Arlington, Va. About 43% of respondents in the “How Housing Matters Survey” say owning a home is no longer “an excellent long-term investment and one of the best ways for people to build wealth and assets,” and over half say buying a home has become less appealing. Although 70% of renters aspire to own a home, some 58% believe that “renters can be just as successful as owners at achieving the American dream.”

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Too late.

The Only Way To Fairness In Housing Is To Tax Property (Monbiot)

You can judge the extent to which ours has become a rentier economy by the furious response to Ed Miliband’s timid proposals to regulate letting. “Venezuelan-style rent controls,” said the Conservative party chairman, Grant Shapps. “The most stupid and counter-productive policy that we have seen from a mainstream party leader for many years,” stomped Stephen Pollard for the Daily Mail. While Miliband’s proposals would be of some use, they ignore the underlying problem: a consistent failure to tax property progressively and strategically. The United Kingdom is remarkable in that it imposes no land value tax and no capital gains tax on principal residences; and charges council taxes that appear to be the most regressive major levies of any kind anywhere in western Europe.

The only capital tax on first homes is stamp duty, but that recoups a tiny proportion of their value when averaged across the years of ownership. Remarkably, it is imposed on the buyer, not the seller. Why should capital gains tax not apply to first homes, when they are the country’s primary source of unearned income? Why should council tax banding ensure that the owners of cheap houses are charged at a far greater relative rate than the owners of expensive houses? Why should Rinat Akhmetov pay less council tax for his £136m flat in London than the owners of a £200,000 house in Blackburn? Why should second, third and fourth homes not be charged punitive rates of council tax, rather than qualifying, in many boroughs, for discounts?

The answer, of course, is power: the power of those who benefit from the iniquities of our property market. But think of what fairer taxes would deliver. House prices have risen so much partly because all the increment accrues to the owner. Were the state to harvest a significant part of this unearned income, it would hold prices down and dampen speculative booms. A land value tax would penalise the owners of empty homes: the resulting rise in supply would also help to suppress prices. The money the state recouped could be used to build affordable housing.

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13 months of falling prices. What does that mean again?

Discounts Drive British Retail To 13th Month Of Deflation (Guardian)

Discounts on clothing and bank holiday offers on DIY and gardening products resulted in prices in British shops continuing to fall last month, according to the British Retail Consortium. With prices across stores falling 1.4% on the year, it was the 13th straight month of deflation, the trade association said. It was, as usual, non-food items that drove the deflation, with their prices falling for a 14th month running. There was some let-up on food too, where inflation held at 0.7%, the lowest on record for the BRC-Nielsen Shop Price Index. “Food inflation is still low, many supermarkets are price-cutting and non-food prices remain deflationary, so the high street continues to generate little inflationary pressure,” said Mike Watkins, head of retailer and business insight at Nielsen.

“Little in the way of immediate seasonal or weather-related price increases is anticipated, so the outlook for the next three months is for relatively stable shop price inflation.” The latest news of benign price pressures on the high street will bring reassurance to Bank of England policymakers as they meet this week to debate how much longer they can leave interest rates at their record low of 0.5%. City economists do not expect any action at this meeting of the monetary policy committee, but some predict an interest rate rise before the end of the year. The latest official data showed consumer price inflation came in at 1.8% in April. That was up from 1.6% the month before, but was still below the Bank’s 2% target.

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Well, they can blame Lidl and Aldi for now.

UK Supermarket Chain Tesco Reports Steep Fall in Sales (CNBC)

U.K. supermarket chain Tesco on Wednesday reported a sharp fall in first-quarter sales, hurt by price cuts and subdued consumer spending. First quarter same-store sales, excluding fuel, fell 3.7%. In a news release, Tesco, which is the grocery market leader in Britain, described the results as “in line with last year’s exit rate, despite the significant reduction in untargeted promotions and deflationary impact of investment in lower prices.” Industry price cuts have driven lower growth in recent months for the U.K. “big four” supermarkets—Tesco, Asda, Sainsbury’s and Morrisons. The latest supermarket share figures from Kantar Worldpanel, published on Tuesday for the 12 weeks ending May 25, 2014, show a slowdown in grocery market growth to 1.7%—the lowest level for at least 11 years.

“To date, it is unclear whether these price cuts are part of normal industry price investment or something more material and the fact that the food commodity price index supports lower food inflation has not helped clarify the issue,” Deutsche Bank analysts said in a report on Tuesday. Tesco Chief Executive Philip Clarke said on Wednesday that Tesco sales had been hit by the supermarket’s own price cuts. He warned investors in a news call not to count on sales improvements in the next few quarters. “Since February, we have cut prices on the products that matter most, cut home delivery charges and made Grocery Click & Collect free,” Clarke said in the news release. “As expected, the acceleration of our plans is impacting our near-term sales performance. The first quarter has also seen a continuation of the challenging consumer trends in the U.K., reflecting still subdued levels of spending in addition to the more structural changes taking place across the retail industry.”

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What a mess Britain is.

RBS Clamps Down On Large Mortgages As Property Bubble Fears Grow (Guardian)

Royal Bank of Scotland has become the second major lender to clamp down on large mortgages, announcing it will restrict lending on loans above £500,000 as fears grow that the London property market is entering bubble territory. The move came as figures from Nationwide building society showed UK house prices hit a new peak in May – breaking the previous high reached before the financial crisis – to hit an average of £186,512. The announcement by the state-backed RBS, which accounts for one in 10 of all UK mortgages, follows a similar decision by the industry leader, Lloyds Banking Group, which is also part-owned by the taxpayer. Like Lloyds, RBS will limit mortgages under its RBS and Natwest brands to four times the applicant’s income if more than £500,000 is being borrowed.

It will also restrict these loans to a maximum 30-year term, in order to prevent borrowers taking out larger mortgages by spreading out repayment over a longer period.A spokesperson for RBS said: “We are focused on looking after the interests of our customers and ensuring that they only take on mortgage lending that they can afford.” The move is likely to increase pressure on other lenders to follow suit so they do not become overexposed to the London property market, where prices have increased by 17% during the past year. According to the Office for National Statistics, the average house price in the capital is £459,000. Andrew Montlake, director at Coreco Mortgage Brokers, said: “There seems to be no coincidence that the two partly state owned banks are the first ones to act in this manner.”

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Denial is easier.

Tories Dismiss EU Advice To Cool UK Housing Market (Guardian)

Senior Conservatives have dismissed advice from European officials that the UK needs to rein back its booming property market, saying George Osborne does not require help from Brussels to help run the economy. Boris Johnson, the London mayor, told Brussels officials “to take a running jump” while Chris Grayling, the justice secretary, rejected the European Commission analysis suggesting the UK should limit the Help to Buy scheme, build more houses and reform property taxes. Speaking on the byelection trail in Newark, he said the EU’s executive body was welcome to offer its view but it “doesn’t mean we’re going to change what we do”. Johnson told London’s Evening Standard: “The eurocrats should take a running jump into the ornamental pond of the Square Marie-Louise [in Brussels].” He added: “A tax on higher-value properties in London would have a detrimental effect on Londoners who are cash-poor but live in appreciating assets. They should butt out.”

The commission rushed out a clarification on Tuesday, saying that its paper did not represent a diktat, before insisting nonetheless that “there is a limit to how much fiscal consolidation can be achieved through spending cuts alone”. The commission warned in its 2014 economic policy proposals for the UK, published on Monday, that more must be done to stop a housing bubble. It said the government should consider changes to Help to Buy to help cool the housing market, along with reforms to the council tax system because it imposes relatively higher taxes on low-value homes. Asked about the intervention, Grayling said: “We’ve got a strategy we think is working in the UK as the fastest-growing economy in western Europe. I don’t think the chancellor needs help from other people to get our economy right. Europe has still got a number of deep-rooted problems … which should be a priority for those people.”

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Nothing at all is being done about the youth jobless problem.

Europe Remains A Jobless Swamp, Despite The Spanish ‘Miracle’ (AEP)

Congratulations to Spain. King Phillip VI will take over a country that created 198,000 jobs in April, the best single month since the glory days of the property boom in 2005. There is a very long way to go. The jobless rate is still 25.1%, rising to 53.5% for youth. Yet if this jobs miracle continues for a few more months it will be one of the great turnaround stories of modern times. (I am assuming that the data is true, a necessary caveat given the stream of articles recently in Le Confidencial accusing the government of cooking figures). Unfortunately, the apparent recovery in jobs in the rest of southern Europe and Holland is largely a mirage, while in Finland it is getting steadily worse. Pan-EMU unemployment fell to 11.7% in April but that is largely because workers are still dropping out of the workforce or fleeing as EMU refugees to reflationary economies.

Italy lost 68,000 jobs in April, according to the country’s data agency ISTAT. The total employed fell to 22,295,000. Italian unemployment rose to 13.6%. For youth it has climbed to a modern-era high of 43.3%, implying very serious damage to Italy’s long-term economic dynamism due to labour hysteresis. The employment rate dropped to 55.2%. Ageing workers are giving up the search for jobs – chiefly in the Mezzogiorno – and returning to their patches of land in impoverished early retirement. Yet all this was recorded as stabilisation in the Italian part of the Eurostat’s release today. You might conclude that the country was starting to claw its way out the crisis. In fact it remains trapped in a hopeless situation inside EMU, with an exchange rate overvalued by 20% to 30% against Germany. France saw a rise in its key jobless gauge by 14,800 in April. INSEE says the number who want to work but are not included in the jobless figures has jumped to 1.3m. This is known as the “unemployment halo”

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Take Weber with a pinch of – political – salt.

Prepare For The Tremors As Europe And America Drift Apart (Axel Weber/FT)

When the governing council of the European Central Bank meets in Frankfurt on Thursday, it is widely expected to announce a loosening in policy, most likely a cut in both the refinancing and deposit rates. Two weeks later, the US Federal Reserve will probably respond to strengthening economic data by moving in the opposite direction, tapering the pace of quantitative easing for the fifth consecutive meeting. This is another sign of how monetary policy is diverging in the two largest economies, a trend that is set to shape funding markets for years to come. In the US, output is set to rebound in the second quarter after having been disrupted by dismal weather in the first. And while price rises have been subdued so far, employment surveys suggest an emerging skills shortage and thus the potential for wage cost growth that could help lift inflation close to the Fed’s 2% target.

By any measure the labour market is tighter in America than in Europe, where the recovery remains weak and uneven despite buoyant financial markets. The gap between actual and potential output will barely shrink in the eurozone this year, and unemployment will remain close to a record high. Before long, these divergent fortunes are bound to lead to large differences in policy. In the US, interest rates could begin to rise in 2015. In Europe, they are likely to stay low for much longer. One might expect that movements in financial markets would reflect these expectations. [..] To my mind, investors should prepare for more volatility this year. The degree of easing of US monetary policy has been exceptional. The tightening, when it begins, will also be unprecedented. The tightening has not yet begun – the Fed’s balance sheet is still expanding. I see significant potential for volatility and setbacks on financial markets over the next few quarters.

In particular, the story is not over for emerging-market countries that rely on cheap dollar funding. The recovery of their stock markets and currencies in the past months does not reflect improved economic fundamentals, but a better mood among investors. These countries are still vulnerable. When US interest rates begin to rise, these borrowers may be able to turn to euro-denominated debt as an alternative source of cheap financing. However, this at best delays adjustment; improving fundamentals remains urgent. The Fed’s balance sheet, which was about half the size of the Eurosystem’s going into the crisis, has now overtaken its European counterpart as a proportion of output. Emerging markets will not be the only ones to suffer when this trend goes into reverse. A tightening in US monetary policy always causes fallout. This time will be no different. In fact, it may be worse, since the tightening starts from extremely expansionary territory.

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Bad.

Japan Base Wages Decline 23 Months In A Row (Zero Hedge)

Proving once again that you can’t print your way to general economic prosperity, Abenomics took another shot to the chest last night as Japan’s base wages failed to rise month-over-month for the 24th month in a row (the longest streak in history). Even after all the promises and hope of the spring wage negotiations, Abe’s ‘plan’ to guilt employers into raising wages is not working; which is especialy problematic given the surge in inflation (as the ‘real’ wage slumped 3.1% in April) As Goldman warns, we caution against excessive expectations for sustained wage growth.

Via Goldman Sachs: “Basic wages still falling even after spring wage negotiations; total wages lifted by special wages/overtime: April total cash wages rose 0.9% yoy, accelerating from March (+0.7%). Special wages increased 20.5% yoy (March: +10.3%), pushing up the total by 0.6 pp. Overtime pay has underpinned wages as a whole recently but is beginning to peak out, although it still rose 5.1% in April (March: +5.8%) and contributed +0.4pp to overall wage growth. Meanwhile, basic wages (80% of the total) remained on a yoy downtrend (April: -0.2%; March: -0.3%). While wage hikes resulting from the spring negotiations (shunto) will be largely reflected in basic wages, the April figure indicates no major change in basic wages since the start of the new fiscal year. Next month’s May data should shed more light, as many companies will include the shunto wage hike portion in salaries from May.”

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Oz has become China’s bitch.

Is Trouble In Store For The Australian Economy? (CNBC)

Australia’s economy appears to be slowing and some economists argue that a more subdued outlook could lead to further monetary easing from the country’s central bank. Australia is due to report first quarter economic growth on Wednesday. While economists polled by Reuters expect robust growth of 3.2% on-year, up from 2.8% in the previous quarter, and 0.9% on-quarter, a marginal increase on 0.8% last quarter, analysts say the economy will take a turn for the worse in the second quarter. “I think the second quarter is where we’ll see a huge disturbance as there’s been a huge change or shift back in [Australia] that will certainly affect that number,” said Evan Lucas, market strategist at IG. “All of a sudden come April things weren’t as rosy coming out of China, people were talking about the budget which was perceived as being quite tough – and as taking 0.3% of GDP out of the economy according to most economists. All of that stuff is going to filter through,” he said.

Lucas expects second quarter growth to slow to 0.4% on-quarter from 0.7-0.8% in the first quarter and sees this pull back prompting the Reserve Bank of Australia (RBA) to take a more dovish stance. “The effects of the budget, the slowdown they’ve finally seen in housing prices, the real under-performance in commodity prices and the consequential effect on the mining space may finally see their neutral status going back to slightly dovish,” he added. Other economists shared this view. Analysts at Goldman Sachs also expect a more dovish tone from the RBA ahead of Tuesday’s policy meeting due to a number of factors. “Commodity prices have fallen sharply, global growth faltered somewhat in early 2014, inflation printed relatively benignly and business and consumer surveys moved lower. In response the RBA incrementally has sounded more dovish,” Goldman analysts said in a note.

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Nice twist.

Singapore Joins China With Dangerous Debt Level (Bloomberg)

Singapore companies’ indebtedness has swelled to the most in Asia after China and India as the city-state’s economic growth slows, according to GMT Research Ltd. Leverage among the Southeast Asian nation’s corporates is following counterparts in the two larger economies to a level considered a “danger threshold,” Gillem Tulloch, founder of the Hong Kong-based researcher, said in an interview yesterday. Debt rose to six times the amount of operating cash flow in 2013 for non-financial Singaporean companies, from 5.1 times in 2012, a report by GMT Research shows.

“It’s a bit surprising that Singaporean companies seem to have leveraged up significantly over the past few years,” said Tulloch, 43, a former analyst at CLSA Asia-Pacific Markets. “There’s been a slight loss of discipline, or it could be that the growth has not come in as expected.” Singapore’s government said last month its export-led economy will experience “modest” expansion in 2014 amid a labor-market crunch. It’s likely that growth is headed for a slowdown, since it can’t be sustained without more stimulus or reckless bank lending, GMT Research said. The leverage ratio in China rose to 7.5 times from 6.8 times last year, while the measure in India grew to 8.1 times from 7 times, the May 28 report showed.

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HA! Where is ”the world” going to get that kind of dough? Borrow from each other?

World Needs to Invest $50 Trillion to Meet Its Energy Needs: IEA (IB Times)

Tens of trillions of dollars in global energy investments will have to be made over the next two decades in order to ensure that the world has enough energy supplies, according to the International Energy Agency, an intergovernmental organization based in Paris. In a special report released Monday, the agency said that nearly $50 trillion of cumulative investment is needed through 2035. More than half of that amount will be spent on extracting, transporting and refining fossil fuels like oil and natural gas. Another $8 trillion is needed to invest in energy efficiency. Upgrades in the electricity sector, including replacing aging power plants and installing new infrastructure, could require $16.4 trillion in investments. Europe alone needs to spend $2 trillion over the years to develop its power industry and fix its broken energy markets, or else risk major blackouts in the coming years, CNN noted.

The IEA stressed the need for oil-producing countries like Saudi Arabia to ramp up investment in new sources of fuel supplies. Although the surge in North American oil and gas production from shale rock has reduced the leverage of Middle East producers in recent years, the shale boom will likely “run out of steam in the 2020s.” If total supplies don’t recover, world oil markets will be tighter and more volatile and oil prices could rise by $15 a barrel in 2025, the report said, according to Platts in London. “Many of our hopes and our worries about the future of the global energy system boil down to questions about investment,” Maria van der Hoeven, the IEA’s executive director, said at the report’s launch.

“Will policies and market conditions create enough investment opportunities in the regions and sectors where they are needed? … And will policymakers succeed in steering investments toward a cleaner, more secure energy system—or are we locking in technologies and patterns of consumption that store up trouble in the future?” Global energy investments totaled more than $1.6 trillion in 2013, a figure that has more than doubled in real terms since 2000, Platts said. According to the IEA, the investment needed every year to supply the world’s energy needs rises steadily towards $2 trillion over the period to 2035.

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The EU is doomed because of this feature. Why would anyone want to be part of it if it only takes away self determination, and charges a price for that too?

The Democracy Deficit: Europeans Vote, Merkel Decides (Spiegel)

Before the European Parliament election last month, voters were told the poll would also determine the next Commission president. In a silent putsch against the electorate, German Chancellor Angela Merkel is now impeding the process. She fears a loss of power and Britain’s EU exit. Merkel had hardly begun her speech last Friday before she got right to the point. With her hands set on the podium in front of her in the Regensburg University auditorium, she said: “I am engaging in all discussions in the spirit that Jean-Claude Juncker should become president of the European Commission.” German news agency DPA immediately sent out a headline reading: “Merkel: Juncker To Be EU Commission President.” And yet, if that is what she really wanted, it’s a goal she could have achieved as early as last Tuesday. Instead, she opted against it. One can, of course, choose to believe the words Merkel delivered last Friday in Regensburg. Or one can focus more on her actions.

Thus far, her actions have spoken a different language. It is the language of one for whom the voters are secondary. The European Union election at the end of May has led to an unprecedented power struggle between the European Parliament and the European Council, made up of the 28 EU heads of state and government. It is a vote that could change the EU more than any past European election. The next several weeks will determine just how democratic the EU wants to be, whether the balance of power in Brussels will have to be readjusted and whether Merkel is really the leader of Europe. With European Social Democrats set to play a key role in the EU struggle, the immediate future could also determine the stability of Merkel’s own governing coalition in Berlin, which pairs her conservatives with the SPD. Should the European Parliament get its way in naming the next European Commission president, it would mark a significant shift of power away from EU leaders, and they likely wouldn’t get it back. It is a development that would make the European Union more democratic and more like a nation-state. But that is exactly what Britain wants to avoid, and any such development could drive the country out of the EU.

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Must read.

The Minsky Moment Meme (Ben Hunt)

Today you can’t go 10 minutes without tripping over an investment manager using the phrase “Minsky Moment” as shorthand for some Emperor’s New Clothes event, where all of a sudden we come to our senses and realize that the Emperor is naked, central bankers don’t rule the world, and financial assets have been artificially inflated by monetary policy largesse. Please. That’s not how it works. That’s not how any of this works. Just to be clear, I am a huge fan of Minsky. I believe in his financial instability hypothesis. I cut my teeth in graduate school on authors like Charles Kindleberger, who incorporated Minsky’s work and communicated it far better than Minsky ever did. Today I read everything that Paul McCulley and John Mauldin and Jeremy Grantham write, because (among other qualities) they similarly incorporate and communicate Minsky’s ideas in really smart ways.

But I’m also a huge fan of calling things by their proper names, and “Minsky Moment” is being bandied about so willy-nilly these days as a name for so many different things that it greatly diminishes the very real value of Minsky’s insights. So here’s the Classics Comic Book version of Minsky’s financial instability hypothesis. Speculative private debt bubbles develop as part and parcel of a business/credit cycle. This is driven by innate human greed (or as McCulley puts it, humans are naturally “pro-cyclical”), and tends to be exacerbated by deregulation or laissez-faire government policy. Ultimately the debt burdens created during these periods of market euphoria cannot by met by the cash flows of the stuff that the borrowers bought with their debt, which causes the banks and shadow banks to withdraw credit in a spasm of sudden fear.

Because there’s no more credit to be had for more buying and everyone is levered to the hilt anyway, stuff either has to be sold at fire-sale prices or debts must be defaulted, either of which just makes the banks withdraw credit even more fiercely. The Minsky Moment is this spasm of private credit contraction and the forced sale of even non-speculative assets into the abyss of a falling market. Here’s the kicker. Minsky believed that central banks were the solution to financial instability, not the cause. Minsky was very much in favor of an aggressively accommodationist Fed, a buyer of last resort that would step in to flood the markets with credit and liquidity when private banks wigged out. In Minsky’s theory, you don’t get financial instability from the Fed massively expanding its balance sheet, you get financial stability. Now can this monetary policy backstop create the conditions for the next binge in speculative private debt? Absolutely. In fact, it’s almost guaranteed to set up the next bubble.

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