Jul 122017
 July 12, 2017  Posted by at 9:21 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »
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Paul Cézanne The Card Players 1895


The Media’s Mass Hysteria Over ‘Collusion’ Is Out Of Control (WaPo)
Donald Trump’s Very Own Big, Fat, Ugly Bubble (Stockman)
Canada’s Housing Boom Expected to Spark Rate Rise (WSJ)
The Return Of The “Minsky Moment” (Rosso)
Martin Luther King’s Economic Dream Changed The Federal Reserve Forever (BI)
Russia Will Retaliate If US Does Not Release Property – Lavrov (R.)
Qatar’s First Shipment of Air-Lifted Cows Lands in Doha (BBG)
Greece’s Market Return May Be Imminent (R.)
NGOs Fearful Of Handing Island Refugee Camps To Greek State (K.)
EU Migrant Rescue Mission ‘Led To Increase In Deaths’ (Ind.)



The echo chamber smells trouble and starts eating its own tail. The WaPo turns on its co-conspirators.

The Media’s Mass Hysteria Over ‘Collusion’ Is Out Of Control (WaPo)

Hysteria among the media and Trump opponents over the prospect of “collusion” between the Trump campaign and the Kremlin may have hit its crescendo this week. That’s right: The wailing from the media and their allies about Donald Trump Jr.’s meeting with some “Kremlin-connected Russian lawyer” (whatever that means) may be the last gasp of this faux scandal. Good riddance. Predictably, the New York Times started the ball rolling with front-page coverage, going so far as to argue, “The accounts of the meeting represent the first public indication that at least some in the campaign were willing to accept Russian help.” As if this were some breakthrough moment. The Times followed up with a headline yesterday that the meeting request and subject matter discussed in the prior story were transmitted to Trump Jr. via an email.

Holy cow. The Times is so desperate to move the story that the meeting’s arrangement over email is being made into Page 1 news. You would have thought it had come through a dead drop under a bridge somewhere. And, of course, CNN has been apoplectic in its breathless coverage, running one story after another about this “development” on the air and online. But Politico takes the prize for the most over-the-top, made-up news, claiming that Donald Trump Jr.’s meeting could amount to a crime. As I have written before, there are always people hovering around campaigns trying to peddle information and traffic in supposed silver bullets. There should be nothing to report on when a private citizen who works at a campaign takes a meeting with a friend of a friend offering information about an opponent. And yet, the media wants to make it a smoking gun.

[..] Regarding the delusion that a crime actually occurred in any of this, my favorite allegation is that by having this meeting and listening to what was said, Donald Trump Jr. somehow could have violated the law. According to Politico, Trump Jr.’s “statements put him potentially in legal cross hairs for violating federal criminal statutes prohibiting solicitation or acceptance of anything of value from a foreign national, as well as a conspiracy to defraud the United States.” I’m just barely a lawyer, but I know over-lawyering when I see it. I mean, by that standard, what if someone walked into a campaign and suggested an idea that led to that candidate’s victory? Would it have been a crime to accept “a thing of value” in the form of an idea? Of course not. This whole thing is getting weird.

For many in the media and elsewhere, the collective grievances that they have against Trump personally, the White House as a whole and Trump’s policies somehow justify their zealous promotion of the “collusion scandal.” But not because the story is valid. Rather, the media know that they are not getting to Trump with anything else. Today, much of the “news coverage” of Trump and Co. is about payback. The media thinks they aren’t getting the truth and so they don’t have to deliver it either. It is a bad cycle that is not working for the White House or the media. With this much intensity, it is hard to see how this ends well..

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Rumor has it Gary Cohn will take over from Yellen.

Donald Trump’s Very Own Big, Fat, Ugly Bubble (Stockman)

The overwhelming source of what ails America economically is found in the Eccles Building. During the past three decades the Federal Reserve has fostered destructive financial mutations on Wall Street and Main Street. Bubble Finance policies have fueled an egregious financial engineering by the C-suites of corporate America. This bubble has skyrocketed to the tune of $15 trillion of stock buybacks, debt-fueled mergers deals and buyouts of the last decade. The Fed fostered a borrowing binge in the household sector after the 1980s. It eventually resulted in Peak Debt and $15 trillion in debilitating debts on the homes, cars, incomes and futures of what used to be middle class America. It also led politicians down the path of free lunch fiscal policy.

By monetizing $4.2 trillion of Treasury and GSE debt during the last three decades, the Fed numbed the US economy from effects of crowding out and rising interest rates that would have come from soaring government deficits. This left the public sector impaled on Peak Debt. Ever since Alan Greenspan launched Bubble Finance in the fall of 1987, public debt outstanding has increased by nearly 9 times. Measured against national output, the Federal debt ratio has risen from 47% to 106% of GDP. These actions have stripped-mined balance sheets and cash flow from main street businesses. The Fed has stifled economic growth while delivering multi-trillion windfalls into the hands of a few thousand speculators on Wall Street.

These rippling waves of financial mutation are why the US economy is visibly failing and why vast numbers of citizens in Flyover America voted for Donald Trump for president. Ironically, even as he stumbled to his victory on November 8, Trump barely recognized that the force behind all the economic failure that he railed against was the nation’s rogue central bank. Only when it occurred to him that Janet Yellen was doing everything possible to insure Clinton’s victory did he let loose an attack on the Fed. In his famous warning, he leveled that America was threatened by a big, fat, ugly bubble. [..] When Wall Street launched a phony Trump Reflation trade during the wee hours of election night, the Donald forgot all about the great bubble. In fact, he quickly embraced it as a sign that investors were enthusiastically embracing Trump-O-Nomics.

No new arrival in the Oval Office was ever more mistaken.

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Create the bubble with ZIRP, milk it for all you can, then walk out and leave millions with grossly overvalued assets as the economy sinks.

Canada’s Housing Boom Expected to Spark Rate Rise (WSJ)

The Bank of Canada is widely expected on Wednesday to raise its benchmark policy rate for the first time in seven years, signaling the Canadian economy is on the path to recovery after years of tepid growth following the global slump in commodities. Canada’s central bank, led by Gov. Stephen Poloz, is joining peers at the Federal Reserve, the Bank of England and the European Central Bank as they dial back on the extraordinary run of ultralow interest rates aimed at jump-starting the global economy in the aftermath of the recession of 2008-09. In Canada, which was hit with an income shock after the downturn in prices of oil and other commodities, low rates have resulted in an extended period of loose money that has fueled a housing boom in pockets of the country.

Some analysts say soaring real-estate prices, which have stretched affordability and forced official measures to curb investing, could be a factor driving Wednesday’s expected increase. Canadian housing starts rose 9.1% to a seasonally adjusted annual rate of 212,695 units in June, Canada Mortgage and Housing Corp. said on Tuesday. Amid recent growth in gross domestic product and robust job creation, Mr. Poloz has signaled he will remove stimulus this week, monetary-policy analysts said. That is even though inflation—at an annualized 1.3% rate in May—remains well below the central bank’s 2% target, and wage growth remains stubbornly low.

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See, I don’t know who Rosso means when he talks about people having forgotten Minsky. Are those the people whose investments he advises on?

The Return Of The “Minsky Moment” (Rosso)

As he was a proponent of a pliable system of reform which could be altered based on the innovative risk humans create, Minsky would have been disappointed to know that the interconnected global shadow banking web continues to expand, Federal Reserve policies have created a great misallocation of financial resources, price discovery of risk assets is basically non-existent and the segment of the population or Main Street that was a concern for him, suffers great wealth inequality and wage disparity. Several catalysts exist today that may remind investors of Minsky. Readers should remain vigilant and keep the following concerns in mind as they invest and manage their personal wealth. The Federal Reserve has appeared to gravitate from data dependent to data ignorant.

Economic data remains sub-par. Inflation has fallen below the Fed’s target of two percent, yet they appear in their statements, determined to continue hiking short-term rates. In theory, a rate-tightening cycle is designed to take the edge off, tap the brake on accelerating economic growth. So, with GDP running below the long-term average of three percent and the personal consumption expenditures or PCE Index, the Fed’s preferred measure of inflation slipping to 1.4% year-over-year in May, the lowest in six months, a question begs asking. Yellen, what are you putting a brake on? Based on the analysis below, the Fed has no reason to continue rate hikes this year. However, they seem hell-bent to ignore the data. Why?

The Fed may be on an unofficial mission to curb stock market speculation. Several Fed officials including Vice-Chairman Stanley Fischer and San Francisco Fed President John Williams have voiced their concerns over lofty stock market valuations. Regardless, of the Fed’s agenda to forge ahead with rate hikes, it’s crucial to remember that low interest rates have been the primary accelerant for stock market appreciation, not earnings growth; rising rates along the yield curve eventually puts a damper on the economy and sets up a prime catalyst for market correction. If the Fed moves too quickly or inflation heats up to warrant swifter action, then a Minsky Moment may be closer than pundits believe.

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Undoubtedly well meant, but it turned the Fed into a political instrument. Not a good thing.

Martin Luther King’s Economic Dream Changed The Federal Reserve Forever (BI)

Most Americans have watched or heard Martin Luther King’s famous “I Have a Dream” speech, delivered before the Lincoln Memorial in Washington in 1963. Few know his rousing call for racial equality was the culmination of an event called the March for Jobs and Freedom. This is crucial because it reveals the central, and largely unrecognized, role of the American civil rights movement of the 1960s on the US approach to economic policy. That included a more prominent role for government in economic stimulus policies and, importantly, a broader, jobs-focused mandate for the Federal Reserve. That role is the focus of a new report by a group of Fed policy activists known as Fed Up, a coalition of community and pro-poor groups that have been pushing the Fed to adopt a more consciously pro-full employment stance.

“From the 1930’s and through the rise of the civil rights movement, racial justice activists including Coretta Scott King, called for a coordinated federal effort to attain full employment,” says the report, published in conjunction with the liberal Center for Economic and Policy Research, referring to Martin Luther King’s wife, who continued his fight after his assassination in 1968. “They envisioned an economy where every person who seeks employment can secure a job. King joined Congressional leaders Augustus Hawkins and Hubert Humphrey in eventually passing the landmark 1978 Full Employment and Balanced Growth Act (Humphrey-Hawkins) which legally required the Fed to pursue maximum employment.” Before the act, the mandate had been limited to low, stable inflation. To this day, Fed Chair Yellen’s semi-annual address to Congress on monetary policy, which is taking place on Wednesday, is known as the Humphrey-Hawkins testimony.

Fed Up and CEPR argue that the employment mandate, while not fully realized, has already generated millions of additional jobs over time, particularly in poor communities, which are most affected by steep levels of persistent unemployment. “There can be no question that the Fed would never have allowed the late 1990s boom and the consequential sharp reduction in the unemployment rate if it did not have a full employment mandate,” the study argues after reviewing data from that period and the rationale used by then-chairman Alan Greenspan for keeping interest rates low despite falling unemployment. The debate remains highly relevant today given that some Fed officials, despite their duty to maintain maximum employment, have recently expressed curious worries about the unemployment rate falling too quickly.

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Expectation is Russia will expel 30 US diplomats.

Russia Will Retaliate If US Does Not Release Property – Lavrov (R.)

Russia will retaliate in a reciprocal manner if the United States does not heed its demands for a return of diplomatic assets, Foreign Minister Sergei Lavrov said on Tuesday. “We hope that the United States, as a country which promotes the rule of law, will respect its international obligations,” Lavrov told reporters after a meeting in Brussels with EU foreign policy chief Federica Mogherini. “If this does not happen, if we see that this step is not seen as essential in Washington, then of course we will take retaliatory measures. This is the law of diplomacy, the law of international affairs, that reciprocity is the basis of all relations.” He declined to answer when asked if that meant that Russia would expel U.S. diplomats and seize diplomatic property.

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Qatar flying in cows from Australia and fruit from Peru says a lot about what’s wrong with the world.

Qatar’s First Shipment of Air-Lifted Cows Lands in Doha (BBG)

The first batch of an anticipated 4,000 dairy cows was flown into Qatar Tuesday, five weeks after the start of a Saudi Arabia-led boycott of the Gulf country. A shipment of 165 cows, sourced from Germany and flying via Budapest, are ready to produce milk immediately and the product should reach local markets this week, according to a spokesman for Power International Holding, which is importing the animals. Other shipments will include cows from Australia and the U.S., and should arrive every three days, the company spokesman said Tuesday. In total, the bovine airlift is expected to bring in the 4,000 cows within about a month. Led by Saudi Arabia, Qatar has been accused of supporting Islamic militants, charges the sheikdom has repeatedly denied.

The boycott that started on June 5 has disrupted trade, split families and threatened to alter long-standing geopolitical alliances. The showdown has forced the world’s richest country per capita to open new trade routes to bring in food, building materials and equipment for its natural gas industry. As part of its response, Qatar has imported Turkish dairy goods along with Peruvian and Moroccan fruit. Until last month, most of the fresh milk and dairy products for Qatar’s population of 2.7 million was imported from Saudi Arabia. When all the cows purchased by Power International Chairman Moutaz Al Khayyat are flown in, his brand of milk will supply about 30 percent of the country’s needs

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What’s Schäuble up to now?

Greece’s Market Return May Be Imminent (R.)

Greece could return to financial markets in the next few weeks, investors and bankers close to the discussions told Reuters, raising private cash that would mark an important step towards ending its dependence on official funding next year. Athens’ largest creditor, the European Stability Mechanism, said on Monday that Greece should develop a strategy to end a three-year exile from markets before its current bailout program expires in mid-2018. Greek finance minister Euclid Tsakalotos met with investors in London last month and one of those funds, BlueBay Asset Management, said the volume of calls they are receiving from bankers about a potential deal suggest it’s very close. “Over the last few months we would get one call on this every couple of weeks (from bankers), but over the last 10 days it seems to be every day I’m getting a call asking about this particular topic,” BlueBay’s Mark Dowding told Reuters.

“One senses we are getting to a point where this feels more imminent. We could well expect to see a deal in the next couple of weeks before investors depart for their summer holidays.” Dowding said BlueBay holds Greek bonds and would buy a new bond issue if the price was attractive. Tsakalotos also met investors including the world’s biggest bond fund PIMCO and US-based asset manager Standish, sources close to those meetings told Reuters. [..] A senior Greek government official told Reuters last week that no decision had yet been made on the timing of a deal. A banker advising Greece on its market return told Reuters on condition of anonymity: “They (Greece) are monitoring the market and they are trying to do something right now, so I wouldn’t rule out a deal within the next week or two.”

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FIghts in the Lesbos Moria camp yesterday.

NGOs Fearful Of Handing Island Refugee Camps To Greek State (K.)

Seven top NGOs aiding refugees in Greece have issued a joint statement expressing their concerns over the handover of responsibilities at migrant camps on the Greek islands to the government as of August 1. The NGOs say the Greek government has released few details about how it plans to continue providing existing assistance to residents at the camps. A deterioration of living conditions and diminished access to essential services are the main concerns cited if the Greek government does not communicate a plan to the NGOs before the handover. Since the start of the year, more than 9,500 refugees and migrants have arrived on the Greek islands, where nearly 14,000 are currently stranded. “Without a transitional plan, vulnerable men, women and children will be put at greater risk,” the statement said.

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The EU: where people go to drown.

EU Migrant Rescue Mission ‘Led To Increase In Deaths’ (Ind.)

A major naval mission spearheaded by the EU has failed to tackle people smuggling in the Mediterranean and may even be leading to higher death tolls, a new report has found. Operation Sophia, launched in 2015, has had little effect in deterring migration and its mandate should not be renewed, according to findings by the House of Lords EU External Affairs Sub-Committee. But the report concludes that the operation’s search and rescue work which has saved the lives of many people should continue. The initiative, involving 25 EU member states including the UK, was set up in the wake of disasters in which hundreds of migrants drowned attempting to reach Europe.

Yet detection of irregular migrants on the central Mediterranean route was at its highest level in 2016, when 181,436 people arrived in Europe by this route — an increase of 18 per cent on 2015, when the figure was 153,842. A naval mission is the “wrong tool” to tackle irregular migration, which begins onshore, the assessment found. It claimed an unintended consequence of Operation Sophia’s destruction of vessels had been that the smugglers have managed to adapt, sending migrants to sea in unseaworthy vessels. This led to a tragic increase in deaths, with 2,150 in 2017 to date, the report added. But it also noted that Operation Sophia vessels have rescued more than 33,000 people since the start of the mission.

The report comes just days after Amnesty International said “reckless” EU operations were destroying smugglers’ safest boats in the Mediterranean and causing more refugee deaths. It claimed the EU had “turned its back” on the search and rescue strategy. A report by the human rights group argued that the search-and-rescue measures implemented in 2015 dramatically decreased the numbers of deaths at sea, but that EU governments had now shifted their focus to disrupting smugglers and preventing boats departing from Libya. It said the EU strategy was “exposing refugees and migrants to even greater risks at sea”, destroying so many of the wooden boats used by smugglers that huge numbers of people had now started making the crossing on less safe rubber dinghies.

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Jun 282017
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James Dean in a photobooth 1949


All Companies Hit By Ransomware Attack Used Bootleg Or Unpatched Software (WS)
Yellen: Banks Very Much Stronger; No Financial Crisis In Our Lifetime (CNBC)
There Is No Excuse For Janet Yellen’s Complacency (Steve Keen)
Yellen: “I Don’t Believe We Will See Another Crisis In Our Lifetime” (ZH)
Trio of Fed Speakers Warn on Valuations With Eyes on Tightening (BBG)
Car Loans, Credit Card Debt Push UK Back Towards Another Credit Crisis (Tel.)
UK Banks Ordered To Hold More Capital As Consumer Debt Surges (G.)
ECB VP: Slack In European Economy Looks Worse Than We Thought (CNBC)
Chinese Satellite Data Hint At Ominous Manufacturing Slowdown (ZH)
UK Government Refuses To Pay For Fireproof Cladding (Ind.)
Democrats The Only Thing Standing In The Way Of Single-Payer In California (CP)
Democrats The Only Thing Standing In The Way Of Single-Payer In California (CP)
The Human Tragedy Of Drug Abuse And Car Crashes (BBG)
Search Results Show Why Europe Is Mad at Google (BBG)
‘Google, Facebook Are Super Monopolies On The Scale Of Standard Oil’ (CNBC)
Greeks Work 203 Days Out Of The Year To Pay Taxes (K.)
Greek Garbage Collectors Reject Compromise As Trash Piles Up (AP)
At Least 24 Migrants Die Off Libya in 48 Hours, More Than 8,000 Rescued (R.)



Wolf Richter explains what happened yesterday. They’re all either thieves or extremely stupid/negligent.

Merck, Rosneft, Ukraine government, Ukraine International Airport, Maersk, WPP (world’s largest advertising agency), Mondelez etc. They’ve all been found to either use bootleg software or not having patched their systems with a readily available Microsoft patch.

All Companies Hit By Ransomware Attack Used Bootleg Or Unpatched Software (WS)

The Petya ransomware attack infected over 2,000 computer systems across the world as of midday today, according to Kaspersky Lab, cited by Reuters. Russia and Ukraine were most affected. Other victims were in Britain, France, Germany, Italy, Poland, and the US. When China starts up its computers, it will suffer the consequences for not staying in bed. The malware includes code known as “Eternal Blue,” which was also used in the WannaCry attack in May. Experts believe the code was purloined from NSA. The ransomware encrypts hard drives of infected machines and then demands $300 in bitcoin in order for the user to regain access. Petya takes advantage of the same vulnerability in Windows as WannaCry. But Microsoft released a patch to fix this vulnerability on March 14.

Patched computers were not affected by WannaCry, and are not affected today. The Windows Malicious Software Removal Tool detects and removes the malware automatically during the updating process. But that update isn’t available for bootleg copies of Windows – hence China’s disproportionate problems with the attack in May. And computers that are running legitimate versions of Windows but hadn’t been updated for whatever reason are vulnerable. Amazingly, when WannaCry hit, plenty of companies were mauled because some dude hadn’t updated their machines. Corporate and government networks were hit. You’d think after the hue and cry in May, all legit corporate systems would be updated, and bootleg copies of Windows would be replaced either by a legit copy of Windows or another operating system. But no. Rinse and repeat.

[..] These are big sophisticated companies, many of them with global operations, and therefore with global IT networks, not mom-and-pop operations. And yet the Windows machines in their networks hadn’t been updated and had remained vulnerable, or were using bootleg copies of Windows that couldn’t be updated, even after all the hoopla in May about this vulnerability. Just sitting here and shaking my head.

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Grandma goes nuts.

Yellen: Banks Very Much Stronger; No Financial Crisis In Our Lifetime (CNBC)

Fed Chair Janet Yellen said Tuesday that banks are “very much stronger” and another financial crisis is unlikely anytime soon. Speaking during an exchange in London with British Academy President Lord Nicholas Stern, the central bank chief said the Fed has learned lessons from the financial crisis and has brought stability to the banking system. Banks last week passed the first round of the Fed’s stress tests to see how they would perform under adverse conditions like a 10% unemployment rate and turbulence in commercial real estate and corporate debt. “I think the public can see the capital positions of the major banks are very much stronger this year,” Yellen said. “All of the firms passed the quantitative parts of the stress tests.”

She also made a bold prediction: that another financial crisis the likes of the one that exploded in 2008 was not likely “in our lifetime.” The crisis, which erupted in September 2008 with the implosion of Lehman Brothers but had been stewing for years, would have been “worse than the Great Depression” without the Fed’s intervention, Yellen said. Yellen added that the Fed learned lessons from the financial crisis and is being more vigilant to find risks to the system. “I think the system is much safer and much sounder,” she said. “We are doing a lot more to try to look for financial stability risks that may not be immediately apparent but to look in corners of the financial system that are not subject to regulation, outside those areas in order to try to detect threats to financial stability that may be emerging.”

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Steve explains that Yellen knows Minsky, but prefers to ignore him.

There Is No Excuse For Janet Yellen’s Complacency (Steve Keen)

Janet Yellen has been reported by Reuters as saying in London yesterday that “she does not believe that there will be a run on the banking system at least as long as she lives”: “Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” Yellen said at an event in London. The only word I can use to describe this belief is “delusional”. The only way in which her belief could be justified would be in financial crises were truly random events, caused by something outside the economy—or just by a very bad throw of the economic dice. This is indeed the perspective of mainstream “Neoclassical” economic theory, in which Yellen was trained, and because of which she was deemed eligible—and indeed eminently suitable—to Chair the Federal Reserve.

This is the theory that led the OECD to proclaim, two months before the crisis began in August 2007, that “the current economic situation is in many ways better than what we have experienced in years”, and that they expected that “sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.”. It is the theory that led her colleague David Stockton, then the Director of the Division of Research and Statistics at the Fed, to dismiss the possibility of a recession after the crisis had begun, in December 2007—the very month that the recession is now regarded as having commenced: “Overall, our forecast could admittedly be read as still painting a pretty benign picture: despite all the financial turmoil, the economy avoids recession and, even with steeply higher prices for food and energy and a lower exchange value of the dollar, we achieve some modest edging-off of inflation.” (FOMC, Dec 2007)

So what we are getting from her is not merely her own personal complacency, but the complacency of an approach to economics which has always been grounded in the beliefs that (a) capitalism is inherently stable, (b) that the financial sector can be ignored—yes that’s right, ignored—when doing macroeconomics, and (c) that the Great Depression was an anomaly that can also be ignored, because it can only have been caused either by an exogenous shock or bad government policy, both of which cannot be predicted in advance.

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It’s a really crazy thing to say. Does she expect to be fired soon?

Yellen: “I Don’t Believe We Will See Another Crisis In Our Lifetime” (ZH)

If there was any confusion why the Fed intends to keep hiking rates, even in the face of negative economic data and disappearing inflation, it was put to rest over the past 2 days when not one, not two , not three, but four Fed speakers, including the three most important ones, made it clear that the Fed’s only intention at this point is to burst the asset bubble. First there was SF Fed president John Williams who said that “there seems to be a priced-to-perfection attitude out there” and that the stock market rally “still seems to be running very much on fumes.” Speaking to Australian TV, Williams added that “we are seeing some reach for yield, and some, maybe, excess risk-taking in the financial system with very low rates. As we move interest rates back to more-normal, I think that that will, people will pull back on that,

Then it was Fed vice chairman Stan Fischer’s turn, who while somewhat more diplomatic, delivered the same message: “the increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites…. Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern.” Fischer then also said that the corporate sector is “notably leveraged”, that it would be foolish to think that all risks have been eliminated, and called for “close monitoring” of rising risk appetites.

All this followed the statement by Bill Dudley, who many perceive as the Fed’s shadow chairman, who yesterday warned that rates will keep rising as long as financial conditions remain loose: “when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation.” And finally, it was Yellen herself, who speaking in London acknowledged that some asset prices had become “somewhat rich” although like Fischer, she hedged that prices are fine… if only assumes record low rates in perpetuity:

“Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” she said. It was not all doom and gloom. Responding to a question on financial system stability, Yellen said post-crisis regulations (and $2.5 trillion in excess reserves which just happen to be fungible and give the banks the impression that they are safe) had made financial institutions much “safer and sounder.” “Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”

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There were smokescreeens a-plenty too.

Trio of Fed Speakers Warn on Valuations With Eyes on Tightening (BBG)

When a trio of Federal Reserve officials delivered remarks on Tuesday, the state of U.S. financial markets came in for a little bit of criticism. When all was said and done, U.S. equities sank the most in six weeks, yields on 10-year Treasuries rose and the dollar weakened to the lowest level versus the euro in 10 months. Fed Chair Janet Yellen said that asset valuations, by some measures “look high, but there’s no certainty about that.” Earlier, San Francisco Fed President John Williams said the stock market “seems to be running very much on fumes” and that he was “somewhat concerned about the complacency in the market.” Fed Vice-Chair Stanley Fischer suggested that there had been a “notable uptick” in risk appetite that propelled valuation ratios to very elevated levels.

The Fed officials’ comments came amid a torrent of events that buffeted financial markets Tuesday, from an IMF cut to its U.S. growth forecast, Google suffering the biggest ever EU antitrust fine, a fresh blow to the Republican agenda in Washington and a global cyberattack. Still, selling in U.S shares accelerated around 1:30 p.m. as Yellen delivered her assessment of the market since the central bank raised interest rates June 14. “Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” Yellen said during a speech in London.

Investors are on guard for signs of a change in its economic outlook that could delay rate increases or when it will begin shrinking its $4.5 trillion balance sheet. Yellen said the Fed’s plans for the balance sheet were “well understood” by financial markets. Officials have said they intend to begin allowing the portfolio to roll off this year. In the end, Yellen made it pretty apparent that that her plans for continued monetary policy tightening haven’t shifted. “We’ve made very clear that we think it will be appropriate to the attainment of our goals to raise interest rates very gradually,” Yellen said.

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All the credit was the only thing that kept the country going.

Car Loans, Credit Card Debt Push UK Back Towards Another Credit Crisis (Tel.)

Banks are “forgetting the lessons” of the financial crisis, increasing the risk of reckless lending which could land them — and the wider economy — in trouble later, Mark Carney has warned. Credit card lending is booming and the Bank of England fears that banks are becoming complacent, assuming the relatively good economic times will continue indefinitely. As a result lenders are cutting down the amount of capital they put aside to keep them safe if those loans turn bad — something that could leave them in financial trouble if there is a recession and customers cannot pay back their debts. “I think it is forgetting some of the lessons of the past, or not fully learning the lessons of the past,” said Mr Carney, the Bank of England’s Governor. He said that the economy overall is performing well and total lending is not getting out of hand, but consumer credit is growing by more than 10pc per year, with credit cards and car loans growing particularly fast.

“Most financial stability indicators are neither particularly elevated nor subdued. Nevertheless, there are pockets of risk that warrant extra vigilance,” he said at the publication of the latest Financial Stability Report. “Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. And lenders may be placing undue weight on the recent performance of loans in benign conditions.” As well as holding more capital against credit card debt and consumer loans, banks have also been warned that next month the Financial Conduct Authority and the Prudential Regulation Authority will also publish new affordability rules to make sure customers are likely to be able to repay their debts.

The situation is deemed relatively urgent — one part of an annual assessment of the losses which banks could make in a hypothetical recession has been brought forwards this year. Instead of publishing the results in November, the consumer credit part of the so-called stress tests will be revealed in September. That decision reflects the short-term nature of consumer loans. Short-term loans can also pose a threat to financial stability because households take them less seriously than mortgages. Consumer debts only amount to one-seventh of the total of mortgage debt, but they account for 10-times the amount of bad loans which banks write off.

That also has implications for the wider economy — a household in financial trouble will cut spending deeply to make sure it can still pay the mortgage, but is less worried about credit cards. Mortgage lending standards are also under the spotlight. The Financial Policy Committee told banks in 2014 that they should assess whether borrowers could still afford their mortgages if the Bank of England’s base rate went up by three%age points. Most banks calculated this by adding 3%age points to their standard variable rates, but some lenders said that in this scenario they might not pass the full cost onto customers. Officials reject this interpretation and have ordered banks to add the full 3 points to their rates when judging the affordability.

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First you lower rates, then you take measures against the fully predictable consequences.

UK Banks Ordered To Hold More Capital As Consumer Debt Surges (G.)

The Bank of England is to force banks to strengthen their financial position in the face of a rapid growth in borrowing on credit cards, car finance and personal loans. The intervention by Threadneedle Street means banks will need to set aside as much as £11.4bn of extra capital in the next 18 months and is intended to protect the financial system from the 10% rise in consumer lending over the year. The Bank is also bringing forward the part of the annual stress tests on banks that scrutinises their exposure to consumer credit by two months to September. The Bank’s Prudential Regulation Authority and the City regulator, the Financial Conduct Authority, will also publish next month how they expect lenders to treat borrowers in the consumer credit market.

The Bank’s half-yearly assessment of risk to financial markets also set out measures to rein in the riskiest mortgage lending, highlighted the risks associated with the UK’s exit from the EU and said commercial property prices were “at the top end of sustainable valuations”. While the Bank found risks to financial stability were neither “particularly elevated nor subdued” it warned that there “pockets of risk that warrant vigilance”. “Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. And lenders may be placing undue weight on the recent performance of loans in benign conditions,” said Mark Carney, governor of the Bank of England.

Carney said the decision to call on banks to hold more capital – which is largely a rejig of their current resources rather than raising new funds – was taken after domestic risks returned to “standard” levels. A year ago, after the Brexit vote, the Bank had relaxed regulatory requirements on banks – using new tools it was given after the financial crisis – and is now reversing that decision.

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“..if we adopt, as in the U.S., a broader concept of unemployment (which in the U.S. they call U6) then unemployment in the euro area is at 18% whereas it is at 9% in the case of the U.S..”

ECB VP: Slack In European Economy Looks Worse Than We Thought (CNBC)

The difference between current and potential levels of output in the euro area economy could be greater than the ECB originally thought, its vice president, Vitor Constancio, warned on Tuesday. “What we see, what we observe is that domestic factors of inflation starting with wage and cost developments and then also price decisions are not responding the way we would expect in view of our more common estimates of this slack. So we have to ask ourselves – are these measures of the slack of the economy correct?,” explained Constancio, speaking to CNBC from the ECB Forum on central banking in Sintra. The board had therefore begun to ask themselves whether other variables should instead be considered to establish a more accurate view of the current economic situation.

“The unemployment rate now is 9.3% according to the normal international standard of measuring employment …. But if we adopt, as in the U.S., a broader concept of unemployment (which in the U.S. they call U6) then unemployment in the euro area is at 18% whereas it is at 9% in the case of the U.S. which would imply that the slack is then bigger than we could judge some time ago,” he noted. “That being the case it justifies fully what the president (Mario Draghi) said at the end of his speech (on Tuesday) that we need persistence. If we want to bring inflation to our target of below but close to 2% then we have to persist in the type of monetary policy that we been adopting,” he added.

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Earlier, we saw Yellen vs Minsky. Here’s China’s Minsky moment.

Chinese Satellite Data Hint At Ominous Manufacturing Slowdown (ZH)

A reading published by San Francisco-based SpaceKnow Inc. which uses commercial satellite imagery to monitor activity across thousands of industrial sites signaled deterioration in the country’s manufacturing sector for the first time since August. The gauge, known as the China Satellite Manufacturing Index, fell to 49.6, below the 50 break-even level. The index incorporates satellite data from thousands of industrial sites across China. Satellite imagery has often proved eerily presceint in the recent past: In the US, satellite data analyzing activity in retailers’ parking lots pointed to significant activity weakness at core US retail locations, even as sentiment indicators were suggesting an uptick in sales following the election. Meanwhile, small- and medium-sized enterprises showed the lowest level of confidence in 16 months, and conditions in the steel business remained lackluster, according to Bloomberg.

Some other indicators have been slightly more sanguine: sales-manager sentiment stayed positive, and outlook of financial experts recovered. Still, data suggest that output in China’s economy slowed during the second quarter after a strong start to the year, with investment slowing, some credit becoming tighter and signs that curbs on the country’s property market are starting to have an impact. Should growth continue to slow, China’s leaders would find themselves in an awkward position, with the country’s twice-a-decade leadership transition expected to occur this fall when the 19th Party Congress convenes to appoint its new senior leadership. It’s widely believed that China’s President Xi Jinping will begin serving his second five-year term.

[..] [That] could be the spark that ignites China’s “Minsky moment” – the financial cataclysm that Kyle Bass and other perma-china-bears have been waiting for when China’s overleveraged market crumbles to dust – might finally be in the offing. Indeed, though China’s markets have been relatively calm recently, the PBOC’s attempts to tighten liquidity have sparked some instability in recent months. Back in March, the central bank had to engage in mini bailouts when a jump in interbank rates caused some small regional lenders to default on their interbank loans after money market rates shot higher. Meanwhile, China’s weakening credit impulse should give any China bulls pause.

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Completely nuts. Feels like they’re looking to get tossed out.

UK Government Refuses To Pay For Fireproof Cladding (Ind.)

Councils face bills running to hundreds of millions of pounds to make tower blocks safe after the Government said it would not guarantee extra money to pay for vital work to prevent a repeat of the Grenfell disaster. Ninety-five high-rise buildings in 32 local authority areas have failed safety tests, the Department for Communities and Local Government (DCLG) said yesterday, with hundreds more blocks still to be tested. The findings prompted Theresa May to announce a “major national investigation” into the use of cladding on high-rise blocks, with every sample so far tested in the wake of the Grenfell found to be unsafe. But despite emergency fire safety checks being carried out nationwide under central government direction, councils will not be reimbursed for refurbishment work carried out.

A DCLG spokesperson said there was “no guarantee” of central government funding and that it would be “up to local authorities and housing associations to pay” for the work needed to ensure residents’ safety. The spokesperson said financial support would be considered on a “case by case” basis for those that could not afford to carry out the necessary work, but did not clarify what the criteria for that consideration would be. The announcement was met with severe criticism from some of the councils affected, with local authorities already having their budgets severely squeezed after years of austerity measures. Julie Dore, leader of Sheffield City Council, which is among the authorities to have discovered unsafe cladding, said “starved” councils would be forced to make cuts to other areas, including schooling, if central government did not help with costs.

“Local authorities have been starved of money over the past seven years. Our spending power has decreased,” she said. “There is no way we can afford to reclad our tower blocks. If we have to find that money, it will come from other projects, from investing in the fabric of our schools, capital investment in our infrastructure, the money has to come out of that. And it can’t really be done. “I say absolutely, categorically that the Government should pay. If they can find £1bn to send to Northern Ireland, that gets more spending per capita than anywhere else, to buy 10 votes, then these people, living in high-rise towers, deserve better.”

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There is no serious press left in the US to get to the bottom of this.

Democrats The Only Thing Standing In The Way Of Single-Payer In California (CP)

Nothing better illustrates the political bankruptcy of the Democratic Party—for all progressive intents and purposes—than California State Assembly Speaker Anthony Rendon’s announcement on Friday afternoon that he was going to put a “hold” on the single-payer health care bill (SB 562) for the state, effectively killing its passage for at least the year. The Democratic Party finds itself in a bind in California. They hold the governorship and a supermajority in both houses of the legislature, so they can pass any bill they want. SB 562 had passed the Senate 23-14. There was enormous enthusiasm among California progressive activists, who [..] were working tirelessly, and hopeful of success. After all, Bernie’s people were taking over the California party from the bottom since the election.

I recall a night of drinking last year with an old friend who has been spearheading that effort, as he rebuffed my skepticism, and insisted that this time there would be a really progressive takeover of the California party, and single-payer would prove it. After all, once enough progressive pressure was been put on the legislators, the bill would be going to super-progressive Democratic Governor, Jerry Brown, who had made advocacy of single-payer a centerpiece of his run for President in 1992, saying: “We treat health care not as a commodity to be played with for profit but rather the right of every American citizen when they’re born.” Bernie foretold. Unfortunately, today that Governor is, according to Paul Song, co-chair of the CHC, “doing everything he can to make sure this never gets on his desk.”

And it won’t. Unfortunately, all the Democrats like Rendon, who “claims to be a personal supporter of single-payer,” will make sure that their most progressive governor is not put in the embarrassing position of having to reject what he’s been ostensibly arguing for for twenty-five years, of demonstrating so blatantly what a fraud his, and his party’s, progressive pretensions are. Thus unfolds the typical Democratic strategy: Make all kinds of progressive noises and cast all kinds of progressive votes, while carefully managing the process so that the legislation the putatively progressives putatively support never gets enacted. Usually, they blame Republican obstructionism, and there certainly is enough of that, and where there is, it provides a convenient way for Democrat legislator to “support” legislation they know will be blocked and wouldn’t really enact themselves if they could.

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Phones are as addictive as opioids.

The Human Tragedy Of Drug Abuse And Car Crashes (BBG)

More than 130,000 Americans are killed annually by preventable causes, and the number has been climbing at a faster rate recently because of opioid abuse and car crashes involving drivers distracted by mobile devices. The death count jumped more than 7% in 2015 to about 146,600, according to a report by the National Safety Council Tuesday. The council said lawmakers often overlook simple solutions that could avoid deaths on the roads or in people’s homes, while public attention is focused on events that are relatively rare in the U.S., like terrorist attacks or plane crashes. Vehicle mishaps and poisonings, driven by opioid abuse, killed more than 80,000 people combined in 2015. Preventable accidents cost society about $850 billion a year, according to the group.

“Culturally, we’re numb to these things,” NSC President Deborah Hersman said in a phone interview. “Why are these deaths any less tragic or important? We should be talking about these things every day because they affect our families.” The toll from opioids is worsening, partly because so many patients become dependent on painkillers, often turning to street drugs like heroin. Almost one in four people on Medicaid, the U.S. health program for the poor, received powerful and addictive opioid pain medicines in 2015, Express Scripts Holding Co. said this month. The council said lawmakers should tighten oversight of the distribution of prescription medications and improve access to drugs that can reverse overdoses and treat addiction.

[..] “We need to make distracted driving socially unacceptable,” Tom Goeltz, whose daughter Megan was killed in a car crash last year, said at a news conference held by the NSC Tuesday. “This tragedy could have easily been prevented.” Goeltz, a Minnesotan who works to help industrial companies avoid accidents, said his daughter was pregnant when her car was struck by a distracted driver. “As a safety consultant with over 30 years of experience, I was powerless to save my daughter,” he said. “We all know people that have been killed on our roads. We all know somebody. How is this acceptable to us? We need to do more. You don’t want to be a part of this club.”

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“..Google has 90 days to come up with its own solution [..]. If it doesn’t do that, the EU will fine it up to 5% of the entire company’s daily global revenue.”

Search Results Show Why Europe Is Mad at Google (BBG)

Europe hit Alphabet’ Google with a $2.7 billion fine on Tuesday, saying it broke antitrust laws by favoring one of its search services over rival websites. The case centers around Google Shopping ads, which place color pictures, prices and links to products that consumers have typed into its search engine. The EU’s Competition Chief Margrethe Vestager said Google’s search algorithms should treat its own Shopping service the same way as other price-comparison sites. What exactly does this look like in practice? Here’s a walk-through of what the EU is so upset about. This is for desktop computer searches. On phones, there’s less digital real estate, leaving even less space for competitors. Before we start, it’s important to note that Google argues customers aren’t that interested in clicking through to other price comparison sites and want to go directly to retailers’ sites from Google. It denies any wrongdoing and is considering an appeal.

Google Shopping Today: The screenshot below shows results for a search in Germany for “gas grill.” Five Google Shopping ads take up the most valuable part of the page at the top. No other comparison shopping websites show up in the first couple of links. Scrolling down, you see the first result for a competing price comparison service – Idealo – come in at number six. There’s another at number 11, Moebel24. But that link is listed as an ad, meaning Moebel24 had to pay for that placement, even though it’s near the bottom of the page. The EU says this is bad because consumers click far more often on results appearing higher up in Google’s search results. Even on a desktop computer, the top ten results on page 1 generally get about 95% of all clicks on generic search results (with the top result receiving about 35% of all clicks), the European Commission said on Tuesday.

2014 Proposal: The EU’s Google investigation has been going for years. Vestager’s predecessor tentatively struck a deal with Google in 2014 for a hybrid model that set aside space in those top Shopping search boxes for other price comparison websites. But the agreement fell apart when competitors realized they had to pay for that placement. [..] What could Google do to satisfy Europe’s demands this time? Vestager said Google has 90 days to come up with its own solution, as long as it gives equal treatment to competing price comparison sites. If it doesn’t do that, the EU will fine it up to 5% of the entire company’s daily global revenue. [..] Google would have to sacrifice space currently occupied by its own Shopping ads to make the latter idea work, cutting into a highly profitably and growing revenue stream.

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US anti-trust laws are strong enough to counter this. But you need politicians to apply them.

‘Google, Facebook Are Super Monopolies On The Scale Of Standard Oil’ (CNBC)

Google shareholders won’t be phased by the EU’s $2.7 billion fine against the company for competition abuses related to its shopping business, Elevation Partners co-founder Roger McNamee told CNBC on Tuesday. “As a shareholder of Google you’re looking at this and saying: ‘We won again,'” McNamee said. The venture capitalist spoke hours after EU regulators fined Google a record €2.4 billion ($2.7 billion), ruling that the search-engine giant violated antitrust rules for its online shopping practices. Google said it will consider appealing the decision to the highest court in Europe. “Google, Facebook, Amazon are increasingly just super-monopolies, especially Google and Facebook. The share of the markets they operate in is literally on the same scale that Standard Oil had … more than 100 years ago – with the big differences that their reach is now global, not just within a single country,” he said on “Squawk Alley.”

The fine is not large enough to change Google’s behavior, he added. “The only thing that will change it is regulations that actually say you can or can’t do something.” McNamee said Google’s business model isn’t structured in a way that allows for competition. “The way that Google’s product works makes its anti-competitive behavior much more obvious — but do not underestimate how powerful Facebook’s monopoly has been to boosting Instagram and WhatsApp,” he said. The competition issue with the big tech companies extends beyond the EU into the U.S., he said. “They do stifle innovation. They stifle entrepreneurship. … You can see this even in Silicon Valley it’s very hard for any of the unicorn generation of companies to actually reach successful critical mass because, you know, one of their competitors gets acquired by Google and Facebook and then the category is over,” said McNamee. “I think it’s a big policy question the world is going to have to deal with over the next few years,” he said.

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The problem is not even the duration, France and Belgium are worse. The problem is what Greeks are left with after taxes are paid, which is much less than the others.

Greeks Work 203 Days Out Of The Year To Pay Taxes (K.)

Greeks will work an average of 203 days this year to pay taxes to the state and social insurance contributions, according to research conducted by the Dragoumis Center for Liberal Studies (KEFIM) to raise awareness about tax freedom day – the first day of the year in which a country has theoretically earned enough income to pay its taxes. In the case of Greece, this day will be on July 23, which means that Greeks will have worked 15 days more than last year, when tax freedom day arrived on July 7. The only two European Union countries in which tax freedom day will arrive after that in Greece are France and Belgium. Cyprus celebrated its tax freedom day on March 29, while Malta and Ireland did the same on April 18 and 30 respectively. Bulgaria was next on May 18 before Finland on June 22.

KEFIM, which conducted research into the topic for a third straight year, said citizens are working an increasing number of days each year to meet their tax obligations and, compared to 2006, Greeks now work two months more to this end. Referring to the results of the research, financial analyst and member of KEFIM’s scientific council Miranda Xafa said the “government managed to achieve a primary surplus by tax hikes and not through spending cuts.” Xafa also said that for every 100 euros a self-employed professional makes, 82 go toward tax and and other contributions. New Democracy vice president Adonis Georgiadis said that Greece had “lost another month because of overtaxation.” “Our aim when we become the government is to reverse the trend,” he said.

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Today is day 12 of the garbage strike. Weekend weather forecast up to 44ºC (111ºF). Some judge needs to declare a public health emergency, if Tsipras is too scared to do it.

Greek Garbage Collectors Reject Compromise As Trash Piles Up (AP)

Greece’s municipal garbage collectors on Tuesday rejected a government compromise offer and decided to continue an 11-day protest that has left mounds of festering refuse piled up across Athens amid high temperatures during the key summer tourism season. Municipal workers union head Nikos Trikas said the protest will go on as planned until Thursday at least, after an inconclusive meeting with Prime Minister Alexis Tsipras. The union is pressing the left-led government to honor a pledge to provide permanent jobs for long-term contract workers, and rejected Tsipras’ proposals as a “slight” but unsatisfactory improvement on past offers. Greek authorities have warned that the uncollected trash poses a public health risk ahead of a heat wave forecast for later this week.

Tourism Minister Elena Kountoura urged the union to reconsider, arguing that the protest “endangers public health, and is bad for tourism as well as the country’s international image.” The Athens Trade Association has also called on the two sides to reach a compromise, warning that piles of garbage would discourage tourists from traveling to the Greek capital. Tourism is a vital source of revenue for Greeces battered economy. Although not technically on strike most of the time, municipal workers have been blockading garages where municipal trash collection trucks operate from, as well as landfill sites across the country. Trikas said that unions will review their position Thursday, when they have called a 24-hour strike. He also pledged to increase emergency crews that the union has on duty to ensure that the garbage mounds do not mushroom out of all control.

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Where are Merkel and Macron? Why are their voters not demanding they tackle the issue?

At Least 24 Migrants Die Off Libya in 48 Hours, More Than 8,000 Rescued (R.)

Red Crescent volunteers recovered the bodies of 24 migrants on Tuesday that were washed up in an eastern suburb of the Libyan capital, Tripoli, as large-scale rescues were made in the Mediterranean. Residents in Tajoura district said the bodies had begun washing up at the end of last week. Several had been partially devoured by stray dogs, according to a local coast guard official. The toll was expected to increase as the flimsy boats used to carry migrants as far as international waters normally carry more than 100 people. Three migrants died in the Mediterranean on Monday night, a German aid group said, during Italian-led rescue operations in which thousands more were pulled to safety.

About 5,000 migrants were picked up off the Libyan coast by emergency services, Italy’s navy, aid groups and private boats on Monday, and rescues were continuing on Tuesday, according to an Italian coastguard spokesman. “Despite all efforts, three people died from a sinking rubber boat” and rescue boats in the area are struggling to cope, German humanitarian group Jugend Rettet said on Facebook. Jugend Rettet (Rescuing Youth) is one of about nine aid groups patrolling seas into which people traffickers have sent more than half a million refugees and migrants on highly dangerous voyages towards Europe over the past four years. “We reached the capacity limit of our ship, while our crew is seeing more boats on the horizon. Currently, all vessels are overloaded,” Jugend Rettet added.

About 72,000 migrants arrived in Italy on the perilous route from Libya between Jan. 1 and June 21, roughly 20% more than in 2016, and more than 2,000 died on the way, according to the International Organization for Migration.

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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.

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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.

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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.

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“..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.

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“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.

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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.

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“..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.

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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.”

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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.

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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.

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“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.

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$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.”

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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.

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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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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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