Oct 052017
 
 October 5, 2017  Posted by at 8:41 am Finance Tagged with: , , , , , , , , ,  5 Responses »
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Juan Gris Guitar on a chair 1913

 

S&P 500 Poised To Lose $10 Trillion In Value (Pal.)
The Sum of All Fears: China Shadow Banking Hits $40 Trillion (DT)
EU Parliament Defends ‘Proportionate Force’ in Catalonia (RT)
Catalonia Chaos Begins to Squeeze Spain’s Financial Markets (DQ)
ECB To Banks: Set Aside More Cash For Bad Debt Amid €1 Trillion Problem (G.)
Investors Are Too Inured to Markets’ Repeated Records (DDMB)
Puerto Rico’s Debt Is Quietly Sitting in Mom and Pop Mutual Funds (Martens)
The Cost Of Not Understanding Sovereign Currencies (Bill Black)
Whose Bright Idea Was RussiaGate? (PCR)
Who Really Holds Power at the Fed (BBG)
Court Orders Trump Administration Reinstate Obama Emissions Rule (AP)
US Honeybee Queen Life Expectancy Halves In 10 Years (NatGeo)
Ancient Bristlecone Pine Forests Overwhelmed By Climate Change (LAT)
60% Of Global Biodiversity Loss Is Down To Meat-Based Diets (G.)
Are Space, Time, And Gravity All Just Illusions? (F.)

 

 

Just so you know.

S&P 500 Poised To Lose $10 Trillion In Value (Pal.)

The last two recessions were devastating for the S&P 500. The dot-com bubble during March 2000 to October 2002 saw the Index drop -49%, while the Global Credit Crisis from October 2007 to March 2009 saw an even greater drop of -57%. Since then, the S&P 500 has been on fire, gaining 250% and breaking record highs almost daily. As the old adage goes, “the bigger they are, the harder they fall”. If the S&P loses 57% in the next market crash, that would represent $10 trillion in value lost, and would take the Index down to 1,077. As the more cyclical sectors begin to decline, portfolio managers will begin to reallocate capital to more attractive sectors. As we noted in our previous write-up, Gold Stocks To Explode When The S&P Implodes, in the current bull market, the S&P is up 247%, while gold stocks are down -30%.

If the pattern holds, the succeeding bear market in the S&P will trigger a major gold rally, which we predict will continue into the next S&P bull. Portfolio managers will look for undervalued stocks in sectors considered safe havens. Gold stocks check all the boxes and a surge of capital will soon find its way into them. Using the materials sector as proxy to gold stocks, we saw in each of the last two bears the weighting of the sector increase. The total value drop was also less in terms of percentage compared to the overall market. We calculate inflows of $206 billion in 2000-2002, and $270 billion in 2007-2009. If the coming drop follows that of the recent recession, we can expect an inflow of at least $440 billion into gold stocks. That is a lot of money on the sidelines. And when it begins to pour in, gold stocks will explode.

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I’ve warned a thousand times on China’s shadow system. This is excellent from ‘Deep Throat’. As I’ve suggested, the shadow system is now bigger than the official one.

The Sum of All Fears: China Shadow Banking Hits $40 Trillion (DT)

Unfortunately, per the People’s Bank of China (PBOC), Shadow Bank lending has reversed course abruptly and skyrocketed since the 2015 McKinsey report. Nobody really knows how big China’s Shadow Bank ecosystem is, but the PBOC recently offered a rather shocking guess in their 2017 Financial Stability Report (pg.48). China’s Off-Balance-Sheet, un-regulated, “Shadow” loans have grown to nearly US $37 Trillion (RMB 252.3 Trillion) and have surpassed China’s US$34 Trillion, “On-Balance Sheet” bank assets as of the close of 2016. They also restated the 2015 numbers, increasing the 2015 figures to US$ 28 Trillion (RMB 189 Trillion), roughly doubling the 2015 figure.

Keep in mind, the PBOC estimating Non-Bank Shadow loans is a bit like the local Sheriff estimating “unreported financial crime”. He doesn’t have authority over the mechanics of the activity, lacks enforcement resources and therefore can’t do much about preventing the crime(s). Even if he had authority and resource, he’d have a hard time zeroing in on the metric….criminals generally don’t respond to surveys or self-report their schemes. Moreover, the Sheriff would have an incentive to under-estimate the problem and hope everything works out, since, at some point, someone is going to be held accountable. As history shows, and Chinese Bankers are well aware of this, financial scoundrels are normally exiled to horrific disgrace on a private tropical island with access to boatloads of Cayman Islands money…..so it goes.

Again, based solely on the usual, limited transparency inherent in PBOC reporting (good things are trumpeted and bad things are swept under the rug), a disclosure like this would indicate that the problem is potentially much larger than they are letting on. In the 2017 Financial Stability Report (an oxymoron if I’ve ever heard one) the PBOC restates the Shadow Bank Assets for 2014 and 2015 (as shown by the dotted line in the chart below). To my knowledge, no other major economy has ever experienced an acceleration anywhere near these levels of Non-Bank, Shadow debt relative to GDP, much less restated it in a gigantic “ooppps….our bad” buried in a couple of paragraphs in the bowels of a report. In China….they do things big. The bigger the better. The two Charts below, prepared by Capital Economics illustrate that we’ve apparently entered uncharted waters.

Although the fiercely independent citizens, politicians and bankers of Hong Kong and Singapore might disagree, we can generalize that the leverage in those economies (tall bars on the left of the chart) is inextricably linked to the Chinese financial system. If there were ever a potential “ground-zero” for a default-induced financial contagion Shang-Hong-apore would be it. Moreover, when we examine the PBOC/CE Charts above, it wouldn’t be much of a reach to conclude that Shadow/Non-Bank Credit has become an absolutely essential tool for keeping all of the financial balls in the air. [..] Jahangir Aziz and Haibin Zhu from JP Morgan said the debts of the state-owned entities (SOEs) have alone reached 90pc of GDP or $13.3 trillion. Nearly 60pc of new credit this year is being used to repay old loans. It takes four times as much new credit to generate a given amount of extra of GDP as it did a decade ago.

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The EU leadership doesn’t give a shit what Europeans think of them (they’re not elected). Wave bye bye.

EU Parliament Defends ‘Proportionate Force’ in Catalonia (RT)

EU member states have the right to use “proportionate” force to defend the rule of law, Frans Timmermans, European Commission First Vice President, said three days after hundreds were injured by Spanish police trying to stop an independence vote in Catalonia. “It is a duty for any government to uphold the rule of law, and this sometimes requires the proportionate use of force,” Timmermans told the European Parliament in Strasbourg during a debate on Catalonia. “Respect for the rule of law is not optional – it’s fundamental,” he said. An independence referendum was held in the relatively prosperous Spanish region of Catalonia on Sunday, despite Madrid labeling it “unconstitutional.” A brutal mass police crackdown during the vote saw over 800 people, including women and the elderly, injured in Barcelona and elsewhere across the region.

“If the law does not give you what you want, you can oppose the law, you can work to change the law, but you cannot ignore the law,” Timmermans said. For the EU, “it is fundamental that the constitutions of every one of our member states are upheld and respected,” he added. According to Timmermans, the Catalan regional government “has chosen to ignore the law in organizing the referendum of last Sunday.” The leader of the largest European Parliament group, the European People’s Party, Manfred Weber, has also decried the Catalan referendum as invalid during the debate. “Who leaves Spain, leaves the European Union,” including the eurozone and the single market, Webber warned the Catalan authorities.

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“..the Rajoy administration dispatched two military convoys to Barcelona today to beef up its coercive capabilities in the city..”

Catalonia Chaos Begins to Squeeze Spain’s Financial Markets (DQ)

Spain’s biggest political crisis of a generation, which has led to the complete breakdown of communication and understanding between its government in Madrid and the separatist region of Catalonia, is finally beginning to take its toll on the country’s financial markets. Spain’s benchmark index, the Ibex 35, slumped nearly 3% following its worst day of trading since the Brexit vote last June. Spain’s 10-year risk premium — the differential between the yield on its 10-year bonds and the yield on Germany’s 10-year bonds — soared to 129 basis points. And that’s despite the fact that the ECB continues to buy Spanish debt hand over fist. But it is the banks that have borne the brunt of the pain this week. On Monday, the first trading day after the independence referendum, they lost €4.84 billion in market value.

Over the past five trading days, shares of the two biggest Catalan-based banks, Caixabank and Banco de Sabadell, have plunged respectively, 9% and 13%. So tense is the situation that the CEOs of each bank felt compelled to release a statement today reassuring customers that they have all the means and tools necessary to protect their interests. Their contingency plans include the option of abandoning their base of operations in Catalonia and moving elsewhere — to Madrid in the case of Sabadell and Mallorca in the case of Caixabank. But it wasn’t just Catalan banks that were caught up in today’s rout. Important Spanish banks with somewhat less exposure to Catalonia also saw their shares plunge.

Santander, Spain’s only global systemically important bank, was down 3.8% on the day’s trading; BBVA, Spain’s second bank which has important operations in Catalonia after acquiring the failed saving bank Catalunya Caixa in 2015, fell 3.6%; and Bankia was also down 3.6%. Standard & Poor’s today put Catalonia’s credit rating — at B+/B, it’s already deep into junk — on review for a downgrade of one notch or more, “if we believed that escalating political tensions between Catalonia’s government and Spain’s central government could put in question the full and timely refinancing of Catalonia’s short-term debt instruments or undermine the effectiveness of the central government’s financial support to Catalonia.” The threat of default moves a step closer.

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$1 trillion and now they start counting?!

ECB To Banks: Set Aside More Cash For Bad Debt Amid €1 Trillion Problem (G.)

The ECB is attempting to put a lid on the near €1tn of bad debts stored in eurozone banks by asking lenders to be more prudent about the way they handle new customers falling behind on repayments. The Frankfurt-based institution issued guidance on Wednesday intended to stop a new pile of problem debts being built up inside eurozone banks by setting out how much cash it wanted lenders to set aside for bad debts incurred from January 2018. The measures are not applicable to the existing €1tn of bad debts, which are largely a legacy of Europe’s financial problems in the aftermath of the 2008 crash and languishing on the balance sheets of banks in countries such as Greece, Cyprus and Italy. The ECB wants lenders to set aside 100% of the value of an unsecured loan within two years and gives lenders seven years to put aside the full amount of a secured loan, such as a mortgage.

The aim is to set a formal guideline for how to tackle problem loans – known as non-performing loans (NPLs) – in contrast to the current situation where there are a variety of approaches across eurozone countries. Policymakers are concerned that bad debts inside banks not only weaken lenders but also make it difficult for them to grant more loans, which in turn can impede economic growth. But they are sensitive to announcing new measures that would make banks more cautious about issuing new loans or push up the cost of borrowing. Sharon Donnery, deputy governor of the Central Bank of Ireland, who presented the latest plan by the ECB to tackle bad debts, said: “We want to prevent a build-up of insufficiently covered NPLs in the future.” The new measures are not applicable to the existing stock of bad debts for which lenders have set aside 45% of the value of their problem loans, so if the new rules had been applied it could have led to multibillion-euro provisions for lenders.

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Who did that headline?

Investors Are Too Inured to Markets’ Repeated Records (DDMB)

After several boom-and-bust cycles it’s clear many investors have exhausted the term “bubble.” Instead, they will recall this cycle with another word: “record.” The question is: Will the memories be tinged with regret? The answer is an unequivocal “yes.” The stock market closes at a fresh high with such frequency it no longer triggers news flashes. The mirror image of these daily records is found in volatility, which has cascaded to record lows. The bond market, though, is where the real action has been since 2011. If the current pace of sales persists through the final quarter of this year, 2017 will mark the seventh consecutive year of record U.S. corporate bond issuance. In exchange, investors are extending issuers record lax lending terms and receiving near-record low returns. It is no longer uncommon for bonds to price at yields that are beneath an issuer’s leverage as gauged by debt as a multiple of earnings.

Moreover, three-quarters of loans sold into the $1 trillion leveraged loan market are of the “covenant-lite” variety, meaning they do not give investors protection against issuers loading themselves up with debt. Buyers have responded by pushing leveraged loan volumes up by more than half this year compared with 2016; issuance is on pace to surpass 2007’s record $534 billion. And while it isn’t at record lows, the yield spread over comparable Treasury bonds that investors receive for investment grade-rated credits has only been lower 20% of the time since 2000. In the case of high-yield credit, the spread has only been lower 14% of the time in the past 17 years.

The differentiating factor in the years 2004 through 2007, when spreads were at their tightest on record, is the relative dearth of securitization, a process by which pools of loans were divvied up into tranches engineered to disperse risk. Investors learned the hard way as the credit crisis unfolded that these “collateralized” vehicles did not perform as well as the underwriters advertised. And yet, while there’s no question the collateralized mortgage obligation, or CMO, hasn’t even flirted with a comeback, the same cannot be said of its cousin, the collateralized loan obligation. In September, CLO issuance volumes surpassed $82 billion, well past the $75 billion high end of what analysts had been forecasting for the full year. Volumes are running at twice last year’s pace and could easily surpass 2007’s record $89 billion level.

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Tax-free is not risk-free.

Puerto Rico’s Debt Is Quietly Sitting in Mom and Pop Mutual Funds (Martens)

There was likely a collective gasp at OppenheimerFunds Inc. yesterday when President Donald Trump made another of those market-moving pronouncements, telling Fox News that Puerto Rico’s debt would have to be wiped out. The President’s remarks suggested he thought the losers would be Wall Street banks. The President stated: “You know they owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be — you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave good-bye to that.” The reality is that a large percentage of Puerto Rico’s debt is held in tax-free municipal bonds and municipal bond mutual funds, owned not by Wall Street banks or tycoons, but by mom and pop investors seeking tax-free income.

(As a result of Congressional legislation, the interest on municipal bonds issued by the Commonwealth of Puerto Rico, its political subdivisions and public corporations, is not subject to Federal, state or local taxes. This has made the individual bonds and mutual funds particularly attractive in places like New York City and to residents of New York counties with high local taxes.) According to a semi-annual report made last month at the Securities and Exchange Commission, Oppenheimer Rochester Fund Municipals, a popular tax-free fund held by many New York investors, was sitting on a boatload of Puerto Rico municipal bonds as of June 30, 2017. The SEC filing shows over 100 different Puerto Rico bonds, issued by the Commonwealth and numerous other Puerto Rico issuers like the Puerto Rico Electric Power Authority and the Puerto Rico Sales Tax Financing Corp. (The fund, of course, holds a widely diversified portfolio of other bonds as well.)

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MMT.

The Cost Of Not Understanding Sovereign Currencies (Bill Black)

Jared Bernstein, Senior Fellow at the Centre on Budget and Policy Priorities and former chief economist to former Vice President Joe Biden, recently published an op ed in the New York Times entitled ‘Do Republicans Really Care About the Deficit?’. Republican elites, of course, have not really cared about federal budget deficits for decades. That is a good thing that Democrats should embrace in a bipartisan spirit. Bernstein, of course, is correct that the Republicans are hypocrites about federal budget deficits, pretending to care about them when the Democrats hold power and displaying their lack of any real care when Republicans hold power and the context is tax cuts for the wealthy.

Democrats display a similar hypocrisy. Even Democrats like Bernstein who know that the Republicans proposed expansion of the federal budget deficit through tax cuts is not a real economic problem are primed to attack Republican hypocrisy by falsely asserting that the Republican deficits would harm the Nation. Democrats should embrace honesty as the best policy and stop embracing the politically attractive pose of claiming to be the Party that “really cares” about the federal budget deficit. That politically attractive pose is not simply dishonest and financially illiterate, it is also a trap. The Republican and New Democrat deficit strategy is to force Democrats to make an endless series of “Sophie’s choices.” Choose which excellent program to kill in order to save (temporarily) another from the chopping block because we supposedly cannot afford to provide both.

Then repeat the process. The Republicans and New Democrats constantly, and falsely, claim that the federal government cannot afford to provide medical care availability that is routinely provided in most of Europe and Canada. It is a pure myth that the United States cannot afford to provide the safety net of Social Security, Medicare, and Medicaid. We need to start with first principles. In a nation with a sovereign currency like the United States, federal tax revenues do not fund federal expenditures. If that sentence, which is indisputably correct, strikes you as bizarre then it is a measure of the force of the propaganda you have been fed throughout your life. Today would be an excellent day to free yourself from the hold of that destructive lie.

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“There is nothing more reckless and irresponsible than convincing a nuclear power that you are going to attack. ”

Whose Bright Idea Was RussiaGate? (PCR)

The answer to the question in the title of this article is that Russiagate was created by CIA director John Brennan.The CIA started what is called Russiagate in order to prevent Trump from being able to normalize relations with Russia. The CIA and the military/security complex need an enemy in order to justify their huge budgets and unaccountable power. Russia has been assigned that role. The Democrats joined in as a way of attacking Trump. They hoped to have him tarnished as cooperating with Russia to steal the presidential election from Hillary and to have him impeached. I don’t think the Democrats have considered the consequence of further worsening the relations between the US and Russia.

Public Russia bashing pre-dates Trump. It has been going on privately in neoconservative circles for years, but appeared publicly during the Obama regime when Russia blocked Washington’s plans to invade Syria and to bomb Iran. Russia bashing became more intense when Washington’s coup in Ukraine failed to deliver Crimea. Washington had intended for the new Ukrainian regime to evict the Russians from their naval base on the Black Sea. This goal was frustrated when Crimea voted to rejoin Russia. The neoconservative ideology of US world hegemony requires the principal goal of US foreign policy to be to prevent the rise of other countries that can serve as a restraint on US unilateralism. This is the main basis for the hostility of US foreign policy toward Russia, and of course there also is the material interests of the military/security complex.

Russia bashing is much larger than merely Russiagate. The danger lies in Washington convincing Russia that Washington is planning a surprise attack on Russia. With US and NATO bases on Russia’s borders, efforts to arm Ukraine and to include Ukraine and Georgia in NATO provide more evidence that Washington is surrounding Russia for attack. There is nothing more reckless and irresponsible than convincing a nuclear power that you are going to attack. Washington is fully aware that there was no Russian interference in the presidential election or in the state elections. The military/security complex, the neoconservatives, and the Democratic Party are merely using the accusations to serve their own agendas. These selfish agendas are a dire threat to life on earth.

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Lots of changes.

Who Really Holds Power at the Fed (BBG)

To the casual observer, the Federal Open Market Committee September meeting in Washington might have looked like any other. But when San Francisco’s John Williams, Minneapolis’s Neel Kashkari, and the other regional Fed presidents took their seats at the big oval table, an historical anomaly glared back from the other side. In a rare alignment of events, the five voting presidents outweighed Board of Governors voters, who include Federal Reserve Chair Janet Yellen. It’s a gap that opened up earlier this year and which looks poised to persist, at least for the near future. This matters. There are 12 Fed presidents, chosen for five-year terms by their regional boards. The seven governors are appointed by the U.S. president and confirmed by the Senate for staggered 14-year terms.

Because of the retirement of Daniel Tarullo, the governor informally tasked with heading financial regulation, the Fed board has been down to four voters since May, and with Vice Chairman Stanley Fischer leaving, it’s possible the number could be down to three by the next FOMC meeting. It looks likely that Randal Quarles, Trump’s first nominee, could be confirmed before that, holding the Governors steady at four. The regional contingent, meanwhile, remains near full force, with only the Richmond Fed currently looking for a new president. At a time when the current occupant of the Oval Office could choose at least four new governors, the power of the regional presidents amounts to a stabilizing backbone and bastion of independence in an era of transition at the Fed. Yellen, Lael Brainard, and Jerome Powell are the holdouts on the board in Washington, and President Trump isn’t expected to reappoint Yellen when her term ends in February.

Thus it could fall to the Fed’s arcane system, born of populist angst, to protect monetary policy from massive upheaval. The current state of affairs underscores how this uniquely American setup, erected in stages beginning in the years before World War I, remains relevant a century later, even though many of the functional duties of the world’s most powerful central bank have changed. “The regional banks are a bizarre set of entities,” says Aaron Klein, a Brookings Institution fellow who studies the central bank. “In some ways the mission of the regional system is to bring in diverse viewpoints that challenge the political board.”

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“Prior to the rule, an estimated $100m in taxpayer-owned natural gas was wasted each year from oil and gas wells operating on public lands in New Mexico..”

Court Orders Trump Administration Reinstate Obama Emissions Rule (AP)

Rebuffing the Trump administration, a federal judge on Wednesday ordered the Interior Department to reinstate an Obama-era regulation aimed at restricting harmful methane emissions from oil and gas production on federal lands. The order by a judge in San Francisco came as the Interior Department moved to delay the rule until 2019, saying it was too burdensome to industry. The action followed an earlier effort by the department to postpone part of the rule set to take effect next year. US Magistrate Judge Elizabeth Laporte of the northern district of California said the department had failed to give a “reasoned explanation” for the changes and had not offered details why an earlier analysis by the Obama administration was faulty. She ordered the entire rule reinstated immediately.

The rule, finalized last November, forces energy companies to capture methane that’s burnt off or “flared” at drilling sites on public lands during production because it pollutes the environment. An estimated $330m a year in methane is wasted through leaks or intentional releases on federal lands, enough to power about 5m homes a year. Methane, the primary component of natural gas, is a leading contributor to global warming. It is far more potent at trapping heat than carbon dioxide but does not stay in the air as long. [..] Democratic senator Tom Udall from New Mexico said the methane rule provides badly needed revenue to states such as New Mexico for public education and other services.

Prior to the rule, an estimated $100m in taxpayer-owned natural gas was wasted each year from oil and gas wells operating on public lands in New Mexico, Udall said, adding that the rule has helped to reduce dangerous air pollution across the west, including a methane cloud the size of Delaware that hangs over the Four Corners region of New Mexico, Utah, Arizona and Colorado.

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What Happens If the Honeybees Disappear?

US Honeybee Queen Life Expectancy Halves In 10 Years (NatGeo)

A honeybee queen, when all is right in her world, should live for two to three years. But in the United States, beekeepers have seen that life span drop by more than half over the past decade, and researchers are trying to determine why. It’s one of many questions surrounding the mystery of honeybee mortality, a disturbing phenomenon that’s linked to a mix of factors, including parasites, pesticides, and habitat loss. Aside from making a delicious natural sweetener, honeybees—which are not native to the U.S.—also provide a crucial service to agriculture: pollination. From apples to almonds, many crops would suffer without honeybees. And while about 90% of beekeepers in this country are hobbyists, the majority of hives belong to large-scale, commercial operations, says North Carolina State University entomologist David Tarpy.

Colony collapse in general could be devastating to food production. So scientists are looking for alternatives. Most honeybees in the U.S. today are of Italian heritage and vulnerable to a pest called the varroa mite. But Russian bees are more resistant to it, and backyard beekeepers have had success with them. The problem, says Tarpy, is that Russian honeybees don’t make as much honey as their Italian counterparts and “aren’t as amenable” to the migratory nature of pollinating large-scale farms. Another option, says wildlife biologist Sam Droege of the U.S. Geological Survey, is to embrace the thousands of North American wild bee species, which are excellent pollinators, rarely sting, and are typically the size of a grain of rice. The drawback for some people is that none of the wild bee species produce honey. But, says Droege, “we can always get honey from other countries.”

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I’ve always been in awe of 5000 year old trees. They ‘saw’ the pyramids being built.

Ancient Bristlecone Pine Forests Overwhelmed By Climate Change (LAT)

For thousands of years, wind-whipped, twisted bristlecone pines have been clinging to existence on the arid, stony crests of eastern California’s White Mountains, in conditions inhospitable to most other life. Their growth rings provide a year-by-year account of the struggle to survive: It’s a tortuous cycle of dying off almost entirely, leaving only a few strips of bark that then continue to grow diagonally skyward or sideways along the ground. But the world’s oldest trees may never have experienced temperature increases as rapid as those of recent decades. The climatic changes have triggered a struggle for dominance, in very slow motion, between the ancient bristlecones and the younger limber pines that have been able to charge up-slope as conditions become warmer and wetter.

Scientists know that bristlecone pines will remain standing for centuries to come. But how will they cope with the intrusion of limber pines competing for sunlight, moisture, nutrients and room to grow? Which plants and animals will be first to adapt to niches in the increasingly diverse forests at elevations above 11,000 feet? [..] average ambient temperatures have risen nearly 2 degrees Fahrenheit in the last century, altering the precarious balance of life in the region long dominated by ancient bristlecone pines — regarded as symbols of longevity, strength and perseverance. “Whenever conditions change, there are winners and losers. And in this case, we won’t know the ultimate outcome for several thousand years,” Smithers said. “But some bristlecone pine forests could face a reduction in range if they’re crowded out … by limber pines moving into their turf.”

Bristlecone pines — named for their bottlebrush-like branches with short needles — are found in other parts of the semiarid Great Basin, which extends from California’s Sierra Nevada east to the Rockies. But the ones found in the White Mountains are the oldest. The slow growers are only about 25 feet tall and expand about 1 inch in diameter every 100 years. One of the oldest of the bunch is Methuselah, at about 4,768 years old. Its precise location is carefully guarded to avert vandalism.

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Animal feed.

60% Of Global Biodiversity Loss Is Down To Meat-Based Diets (G.)

The ongoing global appetite for meat is having a devastating impact on the environment driven by the production of crop-based feed for animals, a new report has warned. The vast scale of growing crops such as soy to rear chickens, pigs and other animals puts an enormous strain on natural resources leading to the wide-scale loss of land and species, according to the study from the conservation charity WWF. Intensive and industrial animal farming also results in less nutritious food, it reveals, highlighting that six intensively reared chickens today have the same amount of omega-3 as found in just one chicken in the 1970s.

The study entitled Appetite for Destruction launches on Thursday at the 2017 Extinction and Livestock Conference in London, in conjunction with Compassion in World Farming (CIFW), and warns of the vast amount of land needed to grow the crops used for animal feed and cites some of the world’s most vulnerable areas such as the Amazon, Congo Basin and the Himalayas. The report and conference come against a backdrop of alarming revelations of industrial farming. Last week a Guardian/ITV investigation showed chicken factory staff in the UK changing crucial food safety information. Protein-rich soy is now produced in such huge quantities that the average European consumes approximately 61kg each year, largely indirectly by eating animal products such as chicken, pork, salmon, cheese, milk and eggs.

In 2010, the British livestock industry needed an area the size of Yorkshire to produce the soy used in feed. But if global demand for meat grows as expected, the report says, soy production would need to increase by nearly 80% by 2050. “The world is consuming more animal protein than it needs and this is having a devastating effect on wildlife,” said Duncan Williamson, WWF food policy manager. “A staggering 60% of global biodiversity loss is down to the food we eat. We know a lot of people are aware that a meat-based diet has an impact on water and land, as well as causing greenhouse gas emissions, but few know the biggest issue of all comes from the crop-based feed the animals eat.”

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Author Ethan Siegel ends up being disappointed.

Are Space, Time, And Gravity All Just Illusions? (F.)

The Universe, as we know it, has a fundamental flaw staring us right in our faces, letting us know that our knowledge is incomplete. The four fundamental forces are described by two different and mutually incompatible frameworks: General Relativity for gravitation, and Quantum Field Theory for the electromagnetic and nuclear forces. Einstein’s theory on its own is just fine, describing how matter-and-energy relate to the curvature of space-and-time. Quantum field theories on their own are fine as well, describing how particles interact and experience forces. But where gravitational fields are strongest, and on the smallest of scales, we have no way of describing nature. The physics of our greatest theories breaks down. Under conventional circumstances, quantum field theory calculations are done in flat space, where spacetime isn’t curved.

We can do them in the curved space described by Einstein’s theory of gravity as well, although the calculations are far more difficult. This semi-classical approach gets us far, but it doesn’t get us everywhere. In particular, there are a few strong-field situations where we simply cannot obtain sensible answers using our current theories: • What happens to the gravitational field of an electron when it passes through a double slit? • What happens to the information of the particles that form a black hole, if the black hole’s eventual state is thermal radiation? • And what is the behavior of a gravitational field/force at and around a singularity? These questions all go unanswered without a quantum theory of gravity. The assumption we normally make is that there is a quantum theory of gravity, and we just haven’t found it yet.

Perhaps it’s string theory; perhaps it’s an alternative approach like loop quantum gravity, causal dynamical triangulations, or asymptotic safety. But since 2009, a new, exciting, and assumption-challenging approach has taken the scene by storm: the idea that gravity itself isn’t a real, fundamental force, but an illusory, emergent one. Pioneered by Erik Verlinde, the idea is that gravity emerges from a more fundamental phenomenon in the Universe, and that phenomenon is entropy. Sound waves emerge from molecular interactions; atoms emerge from quarks, gluons and electrons and the strong and electromagnetic interactions; planetary systems emerge from gravitation in General Relativity. But in the idea of entropic gravity — as well as some other scenarios (like qbits) — gravitation or even space and time themselves might emerge from other entities in a similar fashion.

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Jun 032017
 
 June 3, 2017  Posted by at 8:30 am Finance Tagged with: , , , , , , , , , ,  6 Responses »
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Ervin Marto Paris 1950

 

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New York Times Reinvents Putin’s Comments on America’s Election (Lendman)
A Lifetime Of Debt: NZ’s Biggest Mortgages Are On Auckland North Shore (Stuff)
Obama Joined The Paris Agreement Unilaterally. Trump Can Quit The Same Way (BBG)
Liberal Circus in Washington Ignores Trump’s True Scandals (AHT)
Covfefe Land (Jim Kunstler)
EU Sees Taxpayers Funding Bank Bad-Loan Fix Within Current Rules (BBG)
Greece Approves $8 Billion Chinese-Backed Resort Project Outside Athens (G.)

 

 

Number 4 in the UK charts, but the BBC refuses to play it. It’s just so well done, and so timely, that none of that matters. It’s 40 years ago that the same happened with the SexPistols’ “God save the Queen”. The BBC ban pushed the song up the charts.

Liar Liar: The Protest Song Is Back (CaptainSKA)

NHS crisis, education crisis, u turns … you can’t trust Theresa May. Let’s get this into the top 40. Download now and force the BBC to play it on our airwaves. All proceeds from downloads of the track between 26th May and 8th June 2017 will be split between food banks around the UK and The People’s Assembly Against Austerity. Download from the following links: (Please note we previously released a version of Liar Liar in 2010 so don’t download the wrong one! Correct track is called ‘Liar Liar GE2017’)

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It’s high time to at least have this discussion, and no longer let a bunch of economists deny it flat-out and end it there.

The Magic Money Tree Exists (MMM)

The quality of debate in the 2017 UK General election has been generally terrible. The Tories have been trying to push the “There’s no such thing as a Magic Money Tree” line, and falling straight into the “Don’t think of a pink elephant” problem. This line is known in economic and political circles as The Noble Lie. The Magic Money Tree does exist. They all know it does. When there is a bank to bail out, does anybody ask where the money is coming from? When there is a nuclear missile system that needs building? How about when a foreign nation needs bombing? Like the elephant in the room The Tree cannot be mentioned, because then the electorate might start asking awkward questions about public services – perhaps we should have some? – and taxation – are we overtaxed for the size of government we have, given that we still have people without work?

Once you know about The Tree you might have your politicians delay a casino build and build a hospital instead. You might let the rich people keep their coins, but stop them using them to reserve scare doctors and teachers for their own purposes ahead of the general population. The Tories want to privatise everything, and Labour want to hit rich people hard with taxation sticks. There are no doubt reasons for these fetishes that psychologists would find fascinating. But they are damaging to our nation. They get in the way of doing the job. The debate we should be having is about the size of government we want. And then we instruct our government to provide that. Taxation then is just a thermostat on the wall. You count the bodies in the unemployment queue. If there are too many there is too much taxation and you turn the dial down. If there aren’t any and prices are hotting up, you may have too little taxation so you turn the dial up a little.

Alex Douglas explains in Getting Money out of Politics that the debate is one about resource allocation: “you don’t need to worry about ‘where the money will come from’ to pay for this or that programme or public service. Think about this instead: Are there enough resources to provide the proposed service? Is there enough wood, bricks, glass, PVC, to build new council houses? Is there enough land to build them on? Are there enough builders to build them? If not, are there enough apprenticeships to train them? Are there enough staff in the schools and hospitals? If not, are there enough colleges to train them? If not, are there enough resources to create more of these?” So let’s drop the pretence and get onto the real debate. We know that the last 40 years has been about the magic of the market and that government must constrain itself. It must do as it is told by a small number of unelected technocrats sitting in a central bank ivory tower.

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Watch these 6 minutes. And then watch it again and again until you understand it. The world will never look the same. Share it wherever you can. Make people literate.

The Basics of Modern Money (MMB)

A nation’s currency is a wonderful, powerful thing. Learn how countries like the U.S.—which issue their own sovereign currency—can afford to use that currency to serve their citizens. Get inspired about our untapped potential, and learn to be less worried about the so-called “national debt”!

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Nice find, Michael.

In The Last 10 Years US Economy Grew At Same Rate As In The 1930s (Snyder)

Earlier today I came across an article about President Trump’s new budget from Fox News, and in this article the author makes a startling claim… “The hard fact is that the past decade’s $10 trillion in deficit spending has produced the worst economic growth as measured by Gross Domestic Product in our nation’s history. You read that right, in the past decade our nation’s economy grew slower than even during the Great Depression. This stagnant, new normal, low-growth economy is leaving millions of working age people behind who have given up even trying to participate, and has led to a malaise where many doubt that the American dream is attainable.

When I first read that, I thought that this claim could not possibly be true. But I was curious, and so I looked up the numbers for myself. What I found was absolutely astounding. The following are U.S. GDP growth rates for every year during the 1930s…
1930: -8.5%
1931: -6.4%
1932: -12.9%
1933: -1.3%
1934: 10.8%
1935: 8.9%
1936: 12.9%
1937: 5.1%
1938: -3.3%
1939: 8.0%

When you average all of those years together, you get an average rate of economic growth of 1.33%. That is really bad, but it is the kind of number that one would expect from “the Great Depression”. So then I looked up the numbers for the last ten years…
2007: 1.8%
2008: -0.3%
2009: -2.8%
2010: 2.5%
2011: 1.6%
2012: 2.2%
2013: 1.7%
2014: 2.4%
2015: 2.6%
2016: 1.6%

When you average these years together, you get an average rate of economic growth of 1.33%. I thought that was a really strange coincidence, and so I pulled up my calculator and ran all of the numbers again and I got the exact same results. The 1930s certainly had more big ups and downs, but the average rate of economic growth during that decade was exactly the same as we have seen over the past 10 years. And of course the early 1940s turned out to be a boom time for the U.S. economy, while it appears that our rate of economic growth is actually slowing down. As I noted yesterday, U.S. GDP growth during the first quarter of 2017 was just 0.7%.

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So could the US of course. The problem in Europe is it’s too late now. Getting it right would be seen as too negative in Germany, and it’s Germany, and Germany alone, that ultimately takes ll the main decisions in the EU.

The UK Could Teach The Eurozone About Successful Monetary Unions (CityAM)

The Office for National Statistics (ONS) published last week some figures which show how a successful monetary union works in practice. It is not obvious at first sight, from the dry heading: “regional public sector finances”. The ONS collects information on the amounts of public spending and money raised in taxes across the regions of the UK. The difference is the so-called fiscal balance of the region. Only three regions generate a surplus. In London, the South East and the East of England, total tax receipts exceed public spending. The capital has a healthy positive balance of £3,070 per head, followed by the South East at £1,667 per head. Essentially, these two regions subsidise the rest of the UK. Public spending in the North East, for example, is £3,827 per person above the level of taxes raised in that region.

In Wales, it is even higher at £4,545. No wonder that one of the first things Carwyn Jones, leader of the Welsh Assembly, said after the Brexit vote was: “Wales must not lose a penny of subsidy”. The region which benefits most is Northern Ireland, which gets £5,437 per head more than it generates in tax. Scotland, to complete the picture, receives around half of that, at £2,824 per person. There is a lot of debate around Brexit and the border between the North and the Republic of Ireland. There is even talk of reunification, but on these numbers the Republic would be mad to want it. Essentially, the regions receive these subsidies because they are running deficits on their trade balance of payments. The exports of goods and services from the North East, for example, to the rest of the UK are much less than it imports.

In balance of payments jargon, the subsidy it receives is a monetary transfer from the rest of the country, principally from London and the South East. The ONS does not actually produce regional balance of payments statistics. But the fact that most regions receive these large transfers implies that they are just not productive enough to sustain their living standards by their own efforts. All the regions are in the sterling monetary union. Those running trade deficits cannot devalue to try to improve their position. They must instead rely on subsidy. Exactly the same principles apply in the Eurozone. The massive difference of course is that there is no central Eurozone government to make sure the weaker performing regions receive the necessary funding.

This is why President Macron and Chancellor Merkel announced they will examine changes to treaties to allow for further Eurozone integration. Even the hardline German finance minister, Wolfgang Schauble, said: “a community cannot exist without the strong vouching for the weaker ones”. To be sustainable, a monetary union needs large transfers between its regions. London and the South East already put their hands deep into their pockets for the rest of the UK. Gordon Brown did get one thing spectacularly right. He kept us out of the Euro.

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Not even enough to stand still. Trump recovery? Nah.

Huge Miss: Only 138K US Jobs Added In May; April Revised Much Lower (ZH)

As previewed last night, the jobs “whisper” risk was to the downside, and in what was a very disappointing print released moments ago by the BLS, the whisper was spot on with only 138K jobs added in May, far below the 185K estimate, and below the lowest estimate of 140K. This was the second lowest print going back all the way to last October. Additionally, April’s big beat of 211K was revised substantially lower to only 174K, suggesting that any expectation the Fed may have had of “evidence” the recent economic slowdown was transitory was just crushed.

The change in total payrolls for March was revised down from +79,000 to +50,000, and the change for April was revised down from +211,000 to +174,000. With these revisions, employment gains in March and April combined were 66,000 less than previously reported. This means that over the past 3 months, job gains have averaged 121,000 per month, a far cry from the 181,000 average jobs added over the past 12 months. To be sure, as SouthBay Research points out, a big reason for the unexpected miss was the sharp seasonal adjustment favtor, which was the biggest going back to the financial crisis days:

Not helping the Trump agenda, manufacturing jobs declined sharply, posting the weakest growth of 2017.

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The quality of jobs just keeps deteriorating, even if numbers do not.

US Full-Time Jobs Tumble By 367,000, Biggest Drop In Three Years (ZH)

While on the surface, the payrolls report, the wage growth and the unemployment rate (which dropped for all the wrong reasons) were disappointing, a quick look inside the underlying data reveals even more troubling trends, such as that in addition to the number of employed workers dropping by 233K according to the household survey, the composition of these jobs raised even more red flags because in May the US lost 367,000 full time jobs offset by the gain of 133,000 part time jobs.

Putting this number in context, it was the biggest drop in full-time jobs going back to June 2014. And in this context, we are happy to announce that while manufacturing jobs once again declined by 1,000, the waiter and bartender recovery continues to hum along, with 30,000 workers added in “food services and drinking places.”

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EUrope gets $2 for every $1 increase in growth? I don’t believe that for a second.

The Chinese Economic “Death Spiral” (Rickards)

China has reported annual growth rates since the panic of 2008 of between 6.7% and 12.2%, with a steady downward trend since early 2010. If China’s growth engine is running out of steam, as I’ve described, how has China managed to maintain such relatively high growth rates? The answer is contained in three key words: debt, deflation and waste. Waste is a blunt word referring to non-productive investment. The investment component of China’s GDP is about 45% of the total. Most major economies show about 25% to 35% for investment. But at least half the Chinese investment is wasted. It goes to projects that will never produce an adequate return, either on an absolute basis or relative to alternative uses of the funds. If this wasted investment is subtracted from GDP, similar to a one-time write off under general accounting principles, then 8% growth would be 6.2%, and 6% growth would be 4.7%.

[..] Any economy can produce short-term growth by incurring debt and using the proceeds as government spending, tax cuts, investment, or grants. This is nothing more than the classic Keynesian fiscal stimulus with its mystical “multiplier” effect that produces more than $1.00 in aggregate demand for every $1.00 borrowed and spent. In fact, there’s ample evidence that the Keynesian multiplier only exists when an economy is in recession or the very early stages of an expansion, and when its debt levels are relatively low and sustainable. Highly indebted economies in the late stages of an expansion do not conform to Keynes’ theory of a multiplier. Unfortunately for China, it is both highly indebted and has not suffered a recession for eight years. China should therefore expect the GDP multiplier on new debt used for spending or infrastructure to be less than 1.

That is exactly what the data shows. The chart below measures credit intensity defined as the number of units of local currency needed to produce one unit of growth. The local currency metric is a measured by central bank money printing to monetize debt, and is therefore a proxy for the debt itself. The chart shows that in China today, it takes $4.00 of money printing to produce $1.00 of growth. This is up significantly from 2008 when it took $1.70 of money printing to produce $1.00 of growth. This shows that the Keynesian multiplier is less than 1, in fact it’s 0.25 in China today. (Only Europe shows a true multiplier where less than one unit of new money can produce a unit of growth).

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Russia has used the crisis, and the sanctions, to make its economy more resilient. That’s power.

Russia Can ‘Live Forever’ With $40 Oil in Warning to Hedge Funds (BBG)

A race to the bottom in oil prices may not have many winners, but Russia is certain it can survive. It’s less sure about hedge funds. “We’re actually ready to live forever with the oil price at $40 or below,” Russian Economy Minister Maxim Oreshkin said in a Bloomberg Television interview at the St. Petersburg International Economic Forum on Thursday. “All macroeconomic policy is now based on the assumption of the oil price of $40.” While the world’s biggest energy exporter has made clear it’s hunkering down for years of depressed oil prices, “forever” might be a slight exaggeration, according to the head of Russia’s second-largest bank. Still, “I fully agree with the minister that the oil price is no threat to the economy,” VTB Group CEO Andrey Kostin said during a panel on Friday. As Russia’s future economic plans increasingly converge around crude at that level, Oreshkin says he’s baffled by a more bullish turn taken by hedge funds.

Bets on rising WTI prices jumped the most this year just as Saudi Arabia and Russia were mustering support for the deal they struck in Vienna last month, U.S. Commodity Futures Trading Commission data show. “The oil price within one or two years might be much lower, and those funds which are on the other side of the deals on hedging for one, for two years – they are taking huge risks,” Oreshkin said. Hedge funds’ WTI net-long position – the difference between bets on a price rise and wagers on a drop – rose 20% in the week ended May 23, according to the CFTC. The number had plunged 50% in the previous four weeks. Net-long positions in benchmark Brent – which trades at a small premium to Russia’s Urals export blend – rose 17%, data from ICE Futures Europe showed. Oreshkin questioned “the strategy of those hedge funds” that are striking deals with shale producers for one to two years. “Because the risks are there,” he said.

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Stephen keeps writing despite being gravely ill. Click the link to help.

New York Times Reinvents Putin’s Comments on America’s Election (Lendman)

Instead of reporting precisely what he said, and certainly meant, about fabricated allegations of Russian US election hacking, The Times deliberately misrepresented his recent comments. Interviewed in France by Le Figaro, he repeated what he said many times before. No Russian interference occurred, no evidence suggesting it. “Who is making these allegations,” he asked? “Based on what? If these are just allegations, then these hackers could be from anywhere else and not necessarily from Russia.” Putin knows no hacking occurred. Information was leaked from one or more DNC insiders, no foreign governments involved. He stressed “(i)t makes no sense for (Russia) to do such things. What for?” Speaking to heads of international news agencies on the sidelines of the St. Petersburg Economic Forum, he said “no hackers can influence a foreign election campaign in a significant way.”

“No information leaked this way would resonate with the voters and affect the outcome. We don’t do this at a state level, have no intention of doing it, and on the contrary, we are fighting against it.” He also stressed Moscow’s involvement in creating multi-world polarity. Some countries (meaning US-led Western ones) want Russia contained to further their national interests. “They do this through all kinds of actions that are outside the framework of international law, including economic restrictions,” Putin explained. “Now, they see that this is not working and has produced no results. This irritates them and rouses them into using other methods to pursue their aims and tempts them to up the stakes.” “But we do not go along with these attempts, do not offer pretexts for action. They therefore need to invent pretexts out of nowhere.” Russia, China and Iran are the leading forces against Washington’s hegemonic ambitions – why they’re surrounded by US bases and targeted for regime change.

Addressing the issues of hackers, he said they “can be anywhere…in any country in the world…At the governmental level, we never engage in this. This is what is most important.” He explained attacks can occur from outside Russia made to look like they occurred from its territory. “Modern technology allows that. It is very easy.” It’s a CIA and NSA hacking method to blame Russia, China, Iran or other targeted countries for actions they didn’t commit. “(M)ost important is I am deeply convinced that no hackers can have a real impact on an election campaign in another country,” Putin stressed. “You see, nothing, no information can be imprinted in voters’ minds, in the minds of a nation, and influence the final outcome and the final result.” Those were his recent comments, clearly indicating no Russian direct or indirect involvement in US election hacking or against any other countries.

Instead of reporting what Putin said as I did above, The NYT headlined “Putin Hints at US Election Meddling by ‘Patriotically Minded Russian,” inferring possible state involvement he clearly explained didn’t happen time and again. The Times claimed he “(s)hift(ed) from his previous blanket denials…” False! He did no such thing! The Times: “(H)is comments…were a departure from the Kremlin’s previous position: that Russia had played no role whatsoever in” US election hacking. Fact: His comments repeated what he said many times before, no departure from his position or from any other Russian officials. The Times lied. The Times: “The boundary between state and private action…is often blurry, particularly in matters relating to the projection of Russian influence abroad.”

Again The Times inferred what didn’t happen. If Russian election hacking occurred, incriminating evidence would have been revealed long ago. There’s none, proving accusations are groundless. Instead of truth-telling on this and numerous other vital issues, especially geopolitical ones, notably on Russia, The Times consistently publishes rubbish. Everything it’s reported on alleged Russian US election hacking is disinformation, deception and fake news. Believe none of it.

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$1 US – $1.40 NZD

A Lifetime Of Debt: NZ’s Biggest Mortgages Are On Auckland North Shore (Stuff)

Owning your own home may be the Kiwi dream but some North Shore homeowners are “drowning in debt” without hope of being mortgage-free. New data from credit information website CreditSimple.co.nz showed North Shore homeowners under 55 had an average debt of $542,600: the highest debt in the country. The information also showed Shore homeowners over 55 still owed an average $381,500. This was the second-highest debt in the country, just behind central Auckland’s older homeowners with an average mortgage of $393,200. Brian Pethybridge, the manager of North Shore Budget Service, was not surprised by the figures. “It’s a phenomenon that’s going to rear it’s head basically because mortgages were $500,000 and now they’re looking at $1 million,” he said. “The options that you had before are limited. It’s a sign of the times.”

According to QV’s latest residential house values, the average house on the Shore was valued at $1.195m, up 8.5% on last year. Pethybridge said many North Shore homeowners were unlikely to pay off their mortgage by the time they retired. Many people’s retirement plans involved selling the house and moving to a cheaper area or a retirement village, he said. But Pethybridge warned there was no guarantee house prices would keep on going up. Another risk was that interest rates could go up and homeowners would not be able to service their mortgage repayments, he said. Banks were already warning people to be prepared to pay 7% interest, and Pethybridge remembered a time when interest rates went “up and up”. Some people were already paying interest-only on their mortgage, meaning the debt was not going down, he said.

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“How can one man, even if he is the president, single-handedly alter our international obligations?”

Obama Joined The Paris Agreement Unilaterally. Trump Can Quit The Same Way (BBG)

To critics of President Donald Trump’s decision to withdraw the U.S. from the Paris climate accord, it may seem like presidential fiat is a very dysfunctional way to do foreign policy. How, exactly, is such overwhelming power consistent with checks and balances? How can one man, even if he is the president, single-handedly alter our international obligations? The short answer is the Constitution, not so much in its origins as in its evolution. It’s an important reminder that the tremendous power of the imperial presidency isn’t an unmitigated good – at least when you don’t like the policies of the person holding office. It’s important to note that President Barack Obama put the U.S. into the Paris climate deal exactly the same way Trump took the U.S. out, namely by unilateral executive action.

Obama couldn’t have gotten two-thirds of the Senate to approve a climate protection treaty. That’s the constitutional requirement for a treaty, as designed by the framers, who for the most part didn’t contemplate that the president would be able to commit the U.S. internationally without the participation of Congress. Understanding that he couldn’t turn the Paris deal into a treaty, Obama turned to a tool used by modern presidents to streamline international deal-making: the executive agreement. An executive agreement doesn’t bring all the domestic legal effects of a treaty. Under the Constitution’s supremacy clause, treaties become the law of the land, which is not the case for executive deals. But that isn’t a huge difference today.

Executive agreements are internationally binding like treaties, because international law isn’t focused on domestic processes like ratification but on the promise to join the compact. The Supreme Court has weakened treaties by requiring explicit language for them to have direct domestic legal effect. And the court has also held that executive agreements can affect some domestic legal rights, a reflection of expanded presidential authority. Indeed, the Paris accord was designed to accommodate the reality that Obama needed to be entering into an executive agreement, not a treaty. It doesn’t call itself a treaty or a protocol but an agreement. And it is in practical terms largely nonbinding, calling for countries to set targets without setting sanctions for noncompliance.

Some conservatives have argued that the Paris accord really is a treaty and should have been submitted to the Senate. But whether they’re right or wrong is a matter courts ordinarily wouldn’t address. Given that Obama entered the Paris accord unilaterally, there isn’t much doubt that Trump can withdraw unilaterally. And liberals who would like to think otherwise would do well to recall that without the executive agreement option, the U.S. wouldn’t have joined the deal in the first place. What’s more remarkable still is that, even if the Senate had approved the Paris accord as a treaty, Trump could have withdrawn without getting the Senate’s consent.

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Kabuki gone berserk.

Liberal Circus in Washington Ignores Trump’s True Scandals (AHT)

After suffering a devastating election loss to the weakest candidate the GOP has ever had to offer, establishment liberals have stopped at nothing to rationalize their miserable defeat to reality television star Donald J. Trump, even concocting outlandish McCarthyite theories of foreign interference, in what seems to be intentional, purely for the obfuscation of the Democratic Party’s own deficiencies. Bereft of any evidence whatsoever, political elites accused our old Cold War nemesis, Russia, of interfering in the American presidential election to favor the GOP’s Donald Trump over Democratic Party darling Hillary Clinton. Mass liberal outrage and the Democratic Party’s newfound super-patriotism prompted investigation into foreign hacking claims and the Office of the Director of National Intelligence released its intelligence report on Russian interference in early January.

Despite its grandiose promises of revealing irrefutable evidence of the Kremlin’s direct involvement, the ODNI failed to deliver. Although lauded by both establishments as “damning,” the ODNI’s highly publicized intelligence report provided not a shred of evidence linking Russia to the hacking of the DNC; thus, concluding absolutely nothing. Political analysts, journalists, and those bearing at least some critical thinking ability dismissed the report altogether, as the first half contained nothing but baseless assertions, inconsistencies, and contradictions, while the second half was devoted entirely to irrelevant Russia Today bashing.

One would think that the increased potential of nuclear armageddon would dissuade political elites from accusing a nuclear power of such crimes without solid proof, but liberals never cease to amaze. Unfazed by popular skepticism and/or the general lack of evidence of Russia’s involvement, the liberal bourgeoisie, conjuring recycled Cold War sentiments, advanced their partisan crusade against Trump, painting him as some sort of Russian puppet installed to do the unconditional bidding of President Vladimir Putin. Eleven months have passed since the birth of these Russian hacking conspiracies, but the Trump-Russia non-scandal has persisted to dominate American political discourse ever since — with skepticism in the minority, surviving as fringe thought, at best. Trump’s actual conflicts of interest and legitimate criticism of his policies have drowned into irrelevance as his every tweet receives 24×7 coverage and the liberal mainstream media entertains any and every conspiracy theory of Russian collusion known to man.

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“Did incoming officials in earlier election transitions never meet with Russian diplomats on the way to assuming their duties? And if they did meet, what do you suppose they talked about? The Baltimore Orioles pitching prospects?”

Covfefe Land (Jim Kunstler)

The extraordinary thought disorders of this moment in history are equally distributed across the political spectrum. They’re an inevitable product of what Sigmund Freud identified as the discontents of civilization, but they grow especially acute as that civilization enters an economic crack-up zone. The craziness is equally distributed while the nation’s wealth is not. The old middle, or center, is imploding both economically and psychologically, concentrating distortions of reality at each end, Left and Right. The disordered thought in Trumpism is as self-evident as (a) covfefe, though it came into being out of the authentic pain of those classes that bear the brunt of accelerating collapse. The thought disorders among Trump’s adversaries interest me more, because they emanate from the far more educated ranks of society, the place where rational leadership is supposed to spawn.

If you can’t depend on those people to think straight in difficult times, then it raises the question of what exactly is the value of an advanced education? For instance: the incredible new idea put out by CNN that it is verboten for officials in the government — the president especially — to meet with the Russian ambassador to the United States. I’ve asked this question before, but obviously it needs to be repeated in the face of this persistent nonsense: why do you think nations send diplomats to other lands if not to meet with and communicate with government officials? Since when — and why — are we shocked that a US president would meet in the White House with the Russian ambassador and foreign minister? Did previous presidents not meet with Russian diplomats? Did incoming officials in earlier election transitions never meet with Russian diplomats on the way to assuming their duties?

And if they did meet, what do you suppose they talked about? The Baltimore Orioles pitching prospects? The newest fusion cuisine? Or serious matters of mutual geopolitical interest? Do American diplomats in Moscow avoid meeting with Russian leaders? Why do we even bother to send them there? Whether it is a misunderstanding of reality by the educated people who work on Cable TV news, or a malicious twisting of the public’s credulity, it is producing a grievous breakdown in collective coherence with the potential of causing enormous political mischief in American life. The Dem/Prog “resistance” may think that it is taking a bold stand against a rogue government, but it is only making itself look dangerously unreliable as a supposed alternative to Trumpism.

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Bailin, bailout. Up, down. Flip, flop. The EU is fast eroding any trust it still has.

EU Sees Taxpayers Funding Bank Bad-Loan Fix Within Current Rules (BBG)

EU member states can use public funds to help struggling banks dispose of soured loans, but only within the limits of laws put in place since the financial crisis, according to an EU report. While EU law normally stipulates that the need for “extraordinary public financial support” means a bank is failing and should be wound down, an exception is made for temporary state aid, known as a precautionary recapitalization, to address a capital shortfall identified in a stress test. “It seems conceivable” for governments to use such aid to finance an impaired-asset measure, the May 31 report states. The document says the conditions in EU law for giving state aid to a solvent bank must be observed.

“Dealing with the issue of high NPLs should not imply any deviation from the rules of the banking union,” it states, referring to the package of laws intended to bolster financial stability and deepen integration in the bloc. Andrea Enria, head of the European Banking Authority, has been one of the most vocal proponents of allowing state aid for banks that incur losses in the course of selling bad loans. He told EU lawmakers in April that state aid could be used to “deal promptly and decisively with the significant legacy of asset-quality problems in the European banking sector, which remains a drag on the EU economy.” Freeing up public money to offset banks’ losses could help to chip away at the €1 trillion bad-debt mountain and could smooth the way for bailouts in the EU’s hardest-hit countries, including Cyprus, Portugal and Italy.

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The EU forces one of its sovereign member states to sell its assets to China. That should flash some very bright red lights.

Greece Approves $8 Billion Chinese-Backed Resort Project Outside Athens (G.)

Construction work on a $7.9bn project to develop a sprawling coastal Olympics complex and Athens’s former airport will begin in six months, the Greek government has said. State minister Alekos Flabouraris said on Friday that the leftist administration’s privatisation agency had given the go-ahead to a consortium of Abu Dhabi and Chinese investors backed by the Chinese conglomerate Fosun, which owns 12% of the British holiday company Thomas Cook, to turn the site into a major resort. It had been earmarked as a metropolitan park but was largely abandoned for the past decade. Now the consortium plans to build a 200-hectare (494-acre) park along with apartments, hotels and shopping malls at the site, which also includes some venues from the 2004 Olympics.

Greece committed to sell off state assets under the terms of the international bailout keeping its economy afloat since 2010. Its main private property developer, Lamda, signed a deal in 2014 to build on the Hellenikon coastal area, in one of Europe’s biggest real estate development projects. The announcement came as Greece’s statistics service, Elstat, said the economy expanded in the first three months of 2017, upwardly revising a previous flash estimate in May that showed a 0.1% quarterly contraction. Data showed the economy grew by 0.4% in January to March compared with the final quarter of 2016 when GDP contracted by 1.1%. [..] Under a deal with its EU/IMF lenders, Athens needs to speed up the Hellenikon investment and address any forestry and archaeological issues.

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May 092017
 
 May 9, 2017  Posted by at 8:13 am Finance Tagged with: , , , , , , , , , , ,  4 Responses »
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Pablo Picasso Self portrait 1938

 

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Parts of Asia Will Grow Old Before Getting Rich, IMF Warns (BBG)
Italy Adds Bum Note To Macron’s Ode To Euro Zone Joy (R.)
The Rock-Star Appeal of Modern Monetary Theory (Nation)
To Bury Nuclear Waste, Dig Deeper Than Yucca Mountain (BBG)
Dangerous Times in the Aegean and Cyprus (K.)
New Refugee Center Planned On Chios As Tensions Simmer (K.)
Nearly 200 Missing, 11 Dead As Migrant Boats Sink Off Libya (AFP)
Hundreds Of Migrants Feared Dead In Mediterranean Over Weekend (R.)

 

 

Macron wants Eurobonds, anathema to Germany et al because they would allegedly “sharply reduce each euro zone government’s motivation to pursue sensible fiscal policies..”.

Many in Brussels want a banking union, anathema to quite a few countries. There is no democratic way that leads to such a union. It’s like handing the EU the keys to your country.

Macron Is Not The Solution To Europe’s Top Existential Threat (CNBC)

The future of the euro zone is dependent on a common commitment to solid government finances, says Commerzbank’s chief economist, and France’s new president-elect does not bring the bloc any closer to achieving this reality. The pro-EU and centrist candidate, Emmanuel Macron, stormed to victory against his far-right political rival, Marine Le Pen, on Sunday and is now poised to become France’s youngest ever premier. However, the former economy minister is in favor of joint bond issuance which, according to Jörg Krämer, would sharply reduce each euro zone government’s motivation to pursue sensible fiscal policies. “The EU can’t keep feeling its way from one election to the next. At some point an election might go the wrong way – and if that happens in a large country, the survival of the monetary union would be in jeopardy,” Krämer said in a note.

Commerzbank’s chief economist also warned the repeated near misses of anti-EU political leaders in several European elections in recent years would not last forever and suggested the monetary union’s survival now rests on the bloc’s ability to create a genuine banking union. “To lay these existential risks to rest, the euro zone at long last needs a common commitment to solid government finances. The monetary union’s long-term survival depends on it. But new French President Macron won’t bring this any closer to reality,” he added. Meanwhile, just one day after the pro-business and market-friendly candidate Macron secured his country’s presidential election, EC President Juncker publically lambasted high state spending in the euro zone’s second largest economy. “With France, we have a particular problem … The French spend too much money and they spend too much in the wrong places. This will not work over time,” Reuters reported him as saying in Berlin on Monday.

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Le Pen would have lost against anyone. But tons of Europeans still don’t like what the EU has become. All it takes is a candidate somewhere who’s not Le Pen or Wilders.

“Europe’s Not Out Of The Woods With Macron Win” (ZH)

It appears the chairmen of UBS have plenty to say on Europe.Following former UBS chairman Peter Kurer’s comments that “to the elites, the EU is a means to get rich quickly and export their problems,” UBS current chairman Axel Weber has warned bankers that Europe is not “out of the woods” from its political risks even after Emmanuel Macron’s reassuring victory in the French presidential election. Peter Kurer recently remarked on the end of the Euro…

“Following an unfortunate combination of wrong decisions at the top and the uncontrolled flourishing of a self-serving bureaucracy, the union has moved in a direction where it has become a prisoner of its own constructed reality. The EU was a great idea but it has been ridden to death. Back in 1992, almost half of Swiss voted to join the European Economic Area, including the traveller. If there was a vote today on joining the union, the latest polls say just 15% would vote yes. The EU had its chances. It squandered them, and maybe it will come to an end in the foreseeable future under the weight of its burdens: La messa e finita, andate in pace.”

And over the weekend speaking in Tokyo, as the FT reports, UBS Chairman Axel Weber said that political risk in Europe remained “actually quite high” even though “we’ve seen the centre hold in France” with Macron’s victory over far-right candidate Marine Le Pen, and even though all the signs were that the centre will also hold in the upcoming German location elections.

“That doesn’t mean Europe is out of the woods,” he told the International Institute of Finance’s spring meeting. “There is still Italy where it is very unclear that the centre will hold. And there is still Greece.” He continued: “Where you find some bright side….there are (also) some downside risks that are not really priced into the market but could derail (Europe).” “Brexit is a time bomb… and the countdown is on. It will be two years from now,” Mr Weber said. He added that “if the British really do leave the customs union and single market there could be a lot of volatility which could impact on the global economy”.

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How long can bubbles hold?

Commodities Send Ominous Signal On Global Economy (BBG)

By almost any measure last week was a bad one for commodities, as practically every part of the market lost value. West Texas Intermediate crude oil fell under $44 per barrel, Brent crude broke below $50 per barrel and copper tested $5,500 per metric ton. In China, coal and iron ore tumbled. Gold, the supposed ultimate haven, dropped to almost $1,225 per ounce. Last week’s purge capped a steady decline in prices since mid-April and, more broadly, since February based on the Bloomberg Commodities Index. Although much of the blame is being tied to rather high and growing inventory levels, a lack of real demand shouldn’t be discounted. The market is experiencing something greater than a technical correction or speculative positioning. It is signaling something ominous about the state of the global economy.

So while Friday saw a small recovery, it appears to be merely a “dead cat bounce” rather than a sign of any market bottom. Traders have reason to question global economic strength. They are concerned about fresh signs of an over-extended Chinese economy and an ongoing slowdown in developed markets faced with aging demographics. In the U.S., they question President Donald Trump’s infrastructure promises along with his administration’s relaxed standards in the mining and drilling sectors, whose commodities we already have too much of. OPEC’s output cuts have failed to do enough to stymie the global oil glut as U.S. drillers add to their rig counts. Such negative sentiment has carried through in the equity markets, particularly among commodity-producing nations such as Australia, Canada and Brazil.

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A liquidity problem. And a confidence one.

Traders Are Fleeing the Options Market (WSJ)

Falling volumes and spiraling costs are pushing trading firms out of U.S. options, raising concerns about fragility in a market that investors rely on to protect portfolios. Trading has dwindled in most areas of the market, and investors and traders are grappling with increasing fragmentation. Liquidity, the crucial ability to do trades without significantly moving prices, has deteriorated, according to interviews with market participants and data reviewed by The Wall Street Journal. Options on key indexes, exchange-traded funds and high-volume stocks dominate trading. Meanwhile, there is less activity in the rest of the listed U.S. options world. The stresses prompted at least six prominent options market makers to exit from the business since 2012. Market makers are firms willing to both buy and sell using automated programs.

Thomas Peterffy, a pioneer of electronic options trading, said in March that his firm, Interactive Brokers, would pull the plug on options market making. KCG Holdings announced its exit from retail options market making last year, while UBS and Credit Suisse have also left automated options market making. JP Morgan and Bank of America made similar decisions in 2014, according to people familiar with the matter. “Most market makers congregate in the highly traded products,” Mr. Peterffy said in an interview. “It’s difficult for a market maker to maintain hundreds of thousands of bids and offers all the time.” It is hard to pinpoint what triggered the trader exodus, but industry experts say as firms leave, liquidity gets further drained, which spurs more market makers to retrench.

The dangerous feedback loop could sap appetite for options, key derivative securities that investors use to manage risk in their portfolios. “We could ill afford to lose any more market makers at this junction,” said Alan Grigoletto, who previously worked at the Boston Options Exchange, and now runs Grigoletto Consulting while trading options in his retirement account. Data show the liquidity bifurcation. Index and ETF options volume rose in April by 28% and 4%, respectively, data from the Options Clearing Corporation show. Meanwhile, total equity options volume shrank by 10% from the prior year.

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The car loans issue keeps growing.

The Debt-Bubble Landmine Obama Left For Trump (NYP)

President Trump came in for much jeering when he told reporters he had “inherited a mess” from President Barack Obama. On the economy, though, Obama did indeed leave behind a hidden mess: a seemingly healthy jobs market dependent on cheap debt. When this debt bubble bursts, just as the last one did, the manufacturing jobs Trump wants to save will be in even greater peril. [..] who is borrowing for used cars – and at much higher interest rates – is a huge concern. People with not-great credit scores have always made up about a fifth of the auto-loan market. But the percentage of people borrowing even though they have really bad credit scores has surged, reports Bloomberg. It’s now a third of the subprime auto-bond market, up from just 5% seven years ago. A Standard & Poor’s analysis of just one big subprime auto bond tells the story.

Last week, a company called DriveTime, which sells used cars in 26 states to people with bad credit, was in the market to issue $442 million worth of bonds backed by auto loans. The average credit score of borrowers was 538 — indicating a history of serious default. And, as S&P notes, “today’s subprime customer appears to be . . . weaker . . . than that of several years ago,” because people who defaulted right after the housing crash at least had the excuse that they were caught up in a global bubble. These loans are for people who have no choice but to borrow to buy a car, and no bargaining power on the interest rate they pay: close to 20%. Even though the borrowers pay through the nose, they depend on cheap global credit. With interest rates still near record lows, lenders have to take ever more risk in a low-interest-rate environment to make a little money.

As for that risk: Delinquency rates are rising, with 4.32% of subprime borrowers in general at least 60 days late last year, up from 3.52 two years earlier, says S&P. The bigger risk here isn’t the risk to investors, though. The auto-loan market is still much smaller than the housing market, and the investment world hasn’t created trillions of dollars of derivative securities based on this market (at least not that we know of). And unlike with houses, no one ever expects the value of a car to increase with use. No, this bubble presents a much more direct risk to the economy — and manufacturing jobs. If people with terrible credit can’t borrow an average of nearly $18,000 to buy a used car (what the DriveTime customer pays), the market for used cars collapses. That, in turn, affects the market for new cars. Indeed, the US auto industry has seen sales decline this year, after clocking half a decade of record highs.

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Canadians do the subprime car thing too.

Canadians Buy Record Number of New Cars With Record Amount of Financing (BD)

Canadians aren’t just buying real estate, they’re also treating themselves to new cars. According to a new release from Statistics Canada, sales of new cars reached a record high for February. Great for automobile manufacturers, but not so great for the economy. Debt-fuelled financing makes this more of a warning sign than a boom-time trend. Sales of new motor vehicles across Canada rose to an all-time record for February. The month saw 125,284 sales – a 2.74% increase from the same time last year. The largest segment of sales were seen in Ontario, where 41% of them occurred. This is up slightly from 2016, where Ontario accounted for 39% of sales. Booming real estate prices, and massive numbers for car sales… Ontario better be facing the greatest economy its ever experienced, or it’s in trouble.

Consumers are purchasing more expensive vehicles too. Over $5 billion was spent on new vehicles for the month, bringing the average to $40,100 – up 3.4% from the same time last year. Ontario was below the average for the country, where the average price was $39,400. While prices are lower in Ontario, they’re not exactly budget vehicles either. The uptick in average sale price is due to longer financing terms for buyers. According to the Financial Consumer Agency of Canada (FCAC), Canadians are “increasingly purchasing more car than they can afford,” due to longer financing becoming fashionable. The agency notes that average leases have crept up 2 months, every year since 2010. According to the Bank of Canada (BoC), the average loan was 74 months as of 2015.

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The Canadian debt issue is turning into a total craze.

Majority of Consumers Now See Canadian Home Prices Rising (BBG)

Expectations for Canada’s housing market are heating up, with more than half of respondents in a weekly telephone survey predicting home prices will rise, the first time the measure has topped 50% in records dating back to 2008. The bullishness comes even as a run on deposits at Toronto-based mortgage lender Home Capital leads to heightened scrutiny of a market which policy makers have said is divorced from economic fundamentals. The broad Bloomberg Nanos Canadian Confidence Index fell to 59 in the week ended March 5. Some 50.1% of respondents said they expect local home prices to rise. The figure has climbed for six straight weeks and is higher than the average for the series of 37.1%. Thepercentage of people surveyed in the week ending May 5 who said local home prices will decline in the next six months slid to 10% from 10.7%.

“Consumer sentiment on real estate has gone from hot to hotter,” said Nanos Research Group Chairman Nik Nanos. Housing has led the world’s 10th largest economy over most of this decade as exporters have struggled. The latest burst of housing momentum has led policy makers to question whether it’s being led by supply and demand or by speculation. The Ontario Securities Commission opened hearings into whether Home Capital failed to properly disclose an internal probe into fraudulent mortgage applications, a shakeup in a nation lauded for having the world’s safest banks. The latest Toronto figures also showed prices up 25% in April from a year earlier, still close to the 30% March pace that Ontario Finance Minister Charles Sousa called unsustainable on April 20 when he imposed a foreign buyers tax. Those events haven’t led to more bets on a price decline either, and housing optimists now outnumber pessimists by a factor of five to one.

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So much in debt they can’t pay their bills. Maybe someone should take a look at Canadian inequality, too.

Over 50% of Canadians $200 or Less Away From Not Being Able To Pay Bills (Gl.)

More than half of Canadians are living within $200 per month of not being able to pay all their bills or meet their debt obligations, according to a recent Ipsos survey conducted on behalf of accounting firm MNP. “With such a small amount of wiggle room, any kind of unanticipated hardship, such as a job loss or even a car repair, could send an already struggling family into financial despair,” said Grant Bazian, president of MNP’s personal insolvency practice, which is one of the largest in Canada. For 10% of Canadians, the margin of error when it comes to household finances is even thinner, at $100 or less. But those with anything at all left at the end of the month were in better shape than many: A whopping 31% of respondents said they already don’t make enough to meet all their financial obligations.

Debt is causing Canadians a fair bit of stress, the polling suggests, but few appear to be on track to buff up their monthly financial cushion. Two-thirds of survey takers said they are “less than very confident” about their ability to create an emergency fund. Another hair-raising finding from the survey: Roughly 60% said they don’t have a firm grasp of how interest rates affect debt repayments. The statistic helps explain why many indebted Canadians end up taking on more debt and high-cost loans, said Bazian. “That’s how so many end up in an endless cycle of debt,” he noted. But the data also raises the question of whether Canadians understand the implications of an interest rate hike by the Bank of Canada (BoC). A decision by the BoC to start lifting its key policy rate from historic lows would raise the cost of carrying debt across the country.

The Bank uses interest rates, among other tools, to influence inflation and economic activity. Many economists believe it could start to raise rates in the first half of 2018, as economic growth picks up pace. Although the BoC will probably lift rates gradually and over time, the impact on Canadian wallets will be substantial. For example, as Global News has reported before, a onepercentage point rise in the BoC’s key interest rate would likely push up variable mortgage rates by a similar amount. A variable mortgage rate that’s currently set at 3%, for example, would go up to 4%, which represents a 33% increase in interest payments for the mortgage holder. That’s an extra $83 a month for every $100,000 in outstanding mortgage debt.

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Quebec has strong US trade ties.

Quebec’s Finance Minister: Don’t Dawdle on NAFTA Overhaul (BBG)

Quebec Finance Minister Carlos Leitao has a message for government officials considering a renegotiation of NAFTA: Time is of the essence. “If we are going to renegotiate Nafta, then let’s do it,” Leitao said in an interview Friday at Bloomberg headquarters in New York. “The worst case scenario would be if we spend years talking about renegotiating, but don’t actually do it and it just keeps hanging around and doesn’t get addressed. The longer it drags on, the bigger the real impact on investment.” Canadian Prime Minister Justin Trudeau is facing a lengthy trade battle with the U.S., which also includes calls for a new softwood lumber pact and Donald Trump’s complaints about Canada’s system of protectionist dairy quotas.

It’s all set to drag on as the president has yet to trigger a 90-day notice period to Congress to renegotiate Nafta. The last softwood lumber dispute lasted five years. “The problem with the uncertainty is we don’t know what kind of process we will have,” Leitao said. “Is this going to be along the same lines as the last Nafta negotiations? That was very systematic. There were panels on various issues. It’s that kind of certainty that we would like. The actual nuts and bolts will take time.” Leitao has good reason to be wary of protracted trade battles, with his most recent budget already predicting Quebec’s economic growth will lag behind the Canadian average. Output in Quebec will grow 1.7% this year before slowing to 1.6% in 2018, budget forecasts show. That’s less than the 2.2% and 2.3% forecast for all of Canada over the same period.

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Deleveraging.

Chinese Stocks Head For Longest Losing Streak In 3 Years (BBG)

Chinese stocks pared declines, with technical indicators signaling that a five-day slide may have been overdone. The Shanghai Composite Index was little changed at 3,077.78 as of 1:07 p.m. local time, after declining as much as 0.7% earlier in the day. Consumer shares were the worst performers on the CSI 300 gauge, while telecom companies led gains. The Hang Seng Index climbed 0.4%. An intensifying campaign to reduce leverage in the financial system pushed the Shanghai benchmark to a 2.4% loss in the five days through Monday. This drove the gauge’s relative strength index to below 30, a level that suggests to some traders that an asset is oversold.

The nation’s banking regulator said Monday that lenders should carry out collateral pressure tests at least once a year, while the Securities Times reported that some rural banks had suspended interbank businesses temporarily while officials conduct spot checks. “Some stocks appeared to be very cheap at current levels, and this triggered some bargain hunting,” said Banny Lam, head of research at CEB in Hong Kong. State-owned enterprises that dominate old growth industries, such as banks and commodity producers, have been among the hardest-hit by the deleveraging drive, while new-economy shares remain in favor among overseas investors. That’s led to a wide gap between the nation’s two main offshore gauges: the Hang Seng China Enterprises Index and the MSCI China Index.

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Much collateral doesn’t actually exist. Wealth management products, shadow banks, it’s all not much more than a mirage. It takes faith.

How China Keeps Its Financial System From Collapsing (ZH)

With “risk” in most of the developed world seemingly a long forgotten four-letter word, as seen by today’s plunge in the VIX to a level not seen in 34 years, traders hoping for some “risk event” have been confined to the recent turmoil in China, where overnight not only did trade data disappoint, with both imports and exports missing, but bond yields jumped to the highest level since 2015, dragging stocks lower even as the local commodity crash slammed iron ore and copper to new YTD lows.

While largely a “controlled” tightening, meant to contain China’s out-of-control shadow banking system, the recent gyrations in Chinese capital markets are starting to have a profound impact on local funding, resulting in a collapse in new bond issuance, and according to FT calculations, in April the number of aborted issues rose to 154, up from 94 in March, 32 in February and 31 in January.

As DB added, “local bond markets are practically shut for corporates. In fact, YTD issuance is down 40%+ yoy and net issuance has been negative in three out of the first four months this year. A number of issuers are being forced to cancel bond issuances (over RMB100 billion YTD) and there were reports (Bloomberg) of even CDB halting issuance (though subsequently denied). Some AA corporates are now issuing at north of 7%.” These signs of mounting stress in China’s $9.3 trillion bond market come less than a month after the country’s banking regulator, Guo Shuqing, was quoted as supporting a campaign to sort out chaotic practices, and threatening to resign if the banking system became “a complete mess”.

[..] whether or not China keels over and has a hard (or worse) landing, will depend on the PBOC; when (not if) the central bank gets involved, will depend on how soon China’s banks and various CD-funded financial institutions run out of collateral (whether it exists or not) to sell, such as iron ore, copper, precious metals, bonds and even stocks. This will hardly come as a surprise. As we showed last month, the only reason the Chinese banking system hasn’t imploded, is due to nearly CNY 10 trillion in central bank liquidity support for the local banks, just under 100% of China’s GDP.

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Europe too.

Parts of Asia Will Grow Old Before Getting Rich, IMF Warns (BBG)

Asia’s rapidly aging population means the region is shifting from being the biggest contributor to the global workforce to subtracting hundreds of millions of people from it, according to the International Monetary Fund. The reversal of the so-called “demographic dividend” will drag on global growth and also that in Asia, the world’s fastest growing region, the IMF warned in its annual outlook for the area. The population growth rate will fall to zero for Asia by 2050 – it’s already negative in Japan – and the share of the population who are working-age has already hit its peak, the IMF estimates. That means the ratio of the population aged 65 and older will be almost two and a half times the current level by 2050, and even higher in East Asia.

“The speed of aging is especially remarkable compared to the historical experience in Europe and the United States,” the IMF said. Per capita income in Asia relative to the U.S. remains at much lower levels than those achieved by mature advanced economies in the past. “Countries in Asia will have less time to adapt policies to a more aged society than many advanced economies had,” the fund wrote. “As such, parts of Asia risk becoming old before becoming rich.” For economic growth, the aging process could erode up to one percentage point from annual output over the next three decades in Japan, and between 0.5-0.75 percentage point in China, Hong Kong, South Korea and Thailand.

While some bright spots remain, such as India and Indonesia, demographics could subtract 0.1 of a percentage point from annual global growth over the next three decades, the IMF estimates. It also means Asia is at risk of falling into secular stagnation if an older population leads to excessive savings and low investment renders monetary policy ineffective. The demographic shift will also likely keep downward pressure on real interest rates and asset returns for most major countries in Asia, the IMF said. “Adapting to aging could be especially challenging for Asia, as populations living at relatively low per capita income levels in many parts of the region are rapidly becoming old,” the IMF said.

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It’s time to come clean on how bad Italy is really doing.

Italy Adds Bum Note To Macron’s Ode To Euro Zone Joy (R.)

Italy is adding a bum note to Emmanuel Macron’s ode to joy. While it’s encouraging that a Europhile will take the French presidency after Sunday’s vote, attention can now turn to Europe’s other crisis-in-waiting. Elections are coming in Italy, and there are more of the ingredients for a populist shock than in France. The economy has fared much worse since the creation of the euro zone, with growth averaging zero since 2001, according to the IMF. GDP per capita has fallen in that time. The IMF expects the unemployment rate to reach 11.7% this year, 2 percentage points higher than in France. Anti-EU forces are also spread widely across Italy’s messy political landscape. Stagnation has fuelled support for the 5-Star Movement, which could lead Italy out of the euro zone and currently polls just below 30%.

Mainstream parties are shaky. The left fragmented after former prime minister Matteo Renzi lost his referendum on constitutional reform in December. The right is an awkward alliance between ageing former premier Silvio Berlusconi and more radical anti-EU parties, like the Lega Nord. The risk is that 5-Star forms a coalition with the Lega after elections that must take place by May next year. The economy is picking up, but tighter monetary policy, as the European Central Bank reins in bond buying, could strangle the recovery, as could an overly stern fiscal policy. Italy needs to cut spending or increase taxes by 2percentage points to meet European targets through 2019. Job losses from the restructuring of banks and bankrupt national airline Alitalia could become a lightning rod for anti-EU sentiment.

Europe can help. Italy is likely to miss its fiscal targets anyway, but loosening bloc-wide budget rules to encourage investment and spread out cuts over a long period would cement the recovery. A strong France, aided by Macron’s victory, might persuade Germany to spend more, and give other countries freer rein. However, even if a political shock is avoided, the next election may produce a weak government with no mandate for taking tough decisions to boost growth. Italy could be bringing discord to the region for years.

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MMT must go mainstream.

The Rock-Star Appeal of Modern Monetary Theory (Nation)

To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT’s adherents like to point out that the federal government never “runs out” of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn’t a scarce commodity like silver or gold. “To people who’ve worked in financial markets, who work at the Fed, this isn’t controversial at all,” says Galbraith, who, while not an adherent, can certainly be described as “MMT-friendly.”

The decisions about how to issue, lend, and spend money come down to politics, values, and convention, whether the goal is reducing inequality or boosting entrepreneurship. Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we’re a long way off from that, particularly if we include people who have given up looking for jobs or aren’t working as much as they’d like to among the officially “unemployed.” The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.

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No matter how deep you dig, you can’t guarantee safety for a million years. That’s what’s halted Yucca Mountain. The Bloomberg editors don’t understand the issue either.

To Bury Nuclear Waste, Dig Deeper Than Yucca Mountain (BBG)

Energy Secretary Rick Perry is right to say the U.S. needs a long-term solution to its massive nuclear waste problem. It also makes sense for Perry and some members of Congress to see Yucca Mountain as part of that solution – though many Nevadans promise to make sure it won’t be. But even if Yucca can survive the political fight, it can’t be the only option for disposing of America’s spent nuclear fuel. More than 75,000 metric tons of the stuff are cooling in pools and casks at dozens of power-plant sites around the country. That’s already too much to fit in Yucca Mountain, and the total grows by more than 2,000 tons a year. Other strategies are needed, ideally ones that are less politically radioactive. Consider, for instance, the idea of sinking the waste into boreholes that reach three miles below ground – 15 times as deep as the proposed chambers inside Yucca. Such shafts could be drilled in states that, unlike Nevada, benefit from the use of clean, reliable nuclear power.

Boring into the Earth’s deep rock layers could provide the kind of bury-it-and-forget-it underground disposal necessary for material that will remain dangerous for hundreds of millennia. Local opposition can still be expected; in North and South Dakota, residents have shouted down some plans to dig test holes. That’s why a so-called consent-based strategy, identifying locations with both the appropriate geology and an agreeable population, is necessary. If hosting a waste site means more funding for local public works and services, more communities might be willing to accept one. (This proved to be the case in Carlsbad, New Mexico, home to a storage place for low-level waste from nuclear weapons.) A familiarity with nuclear power may also encourage acceptance, perhaps because there is a nuclear plant in the area employing people and providing power.

The same approach could also be used to locate six or seven centers where waste from several nuclear plants could be stored while it awaits burial. Such containment facilities could also include research centers – mini national laboratories where scientists could work out new ways of reprocessing fuel and perhaps conduct demonstration projects for reactors designed to use safer fuels. The one thing the U.S. should not do is continue to neglect the growing quantities of nuclear waste. Over the past few decades, electricity ratepayers have contributed more than $34 billion to a national fund to pay for a geologic disposal site. And because none yet exists, taxpayers are forking over billions more to enable nuclear-plant operators to manage interim storage. The political barriers to solving this problem may be high, but further delay – and an undue fixation on Yucca Mountain – won’t make them any easier to overcome.

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Turkey will provoke Greece at some point, and US and Europe had better prevent that from happening.

Dangerous Times in the Aegean and Cyprus (K.)

The concept of gray zones (the claim that the sovereignty of a number of islands and islets in the Aegean is undetermined) was a novel idea that Turkey came up with 20 years ago. At some point, Ankara reached the point of including the Greek island of Gavdos in its gray zones list. Whenever Athens made an official request regarding the islands or rocky outcrops that Turkey had on its list, the answer was always very vague: “Anything that is not clearly included the bilateral agreements that set out Greece’s borders with other countries.” At first, many people thought this was a bargaining chip that Ankara would trade as part of a grand bargain. They were wrong. The failure to settle differences between Greece and Turkey gave Ankara the opportunity to add more issues to the agenda.

Over time, these have become permanent and ever-expanding. Currently, Turkey considers significant parts of the Aegean to be gray zones. This includes islands that have been inhabited for decades. It is questioning Greek sovereignty through its actions, not just its words, by the frequent presence of naval vessels in Greek waters and overflights by fighter jets. Over the last few months, it has being doing this more systematically and openly. Greece’s approach has also changed. The doctrine that existed in the wake of the Imia crisis in 1996, when the two countries almost went to war, was based around not building up tension following various incidents and maintaining a low profile.

[..] A dangerous situation is also playing out in Cyprus. The Turks are trying to impose the concept of gray zones there as well. July (when a new round of drilling for hydrocarbons is due to begin off Cyprus) promises to be a difficult month. Ankara will attempt before then to intimidate the companies that plan to start drilling or try to obstruct them if they are not scared off by threats.

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Prison camps are no solution.

New Refugee Center Planned On Chios As Tensions Simmer (K.)

The exact site for the creation of a new so-called pre-departure camp for migrants and refugees on the island of Chios will be determined by May 20, authorities said on Monday. The new camp will come as tensions at overcrowded reception centers on the eastern Aegean island continue to simmer, with almost daily clashes between stranded migrants of different ethnicities. “The experience of Lesvos and Kos where such centers have been created is positive,” said Lieutenant General Zacharoula Tsirigoti of the Greek Police in a press briefing Monday on Chios. Pre-departure centers are deemed essential as they house refugees and migrants returning to Turkey. Tsirigoti added that building a new center on the island is a “one-way street” as locals – many of whom have campaigned for the immediate removal of all migrants and refugees from Chios – say the situation has reached breaking point and that the large police force on the island has been unable to cope.

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The season is just starting: “..the trend points to around 250,000 people arriving over the course of 2017”. There is no place for these people in Italy and Greece.

Nearly 200 Missing, 11 Dead As Migrant Boats Sink Off Libya (AFP)

Eleven migrants have died and nearly 200 are missing after two boats sank off the coast of Libya, UN agencies said Monday citing survivors, in the latest such tragedy. The first involved an inflatable craft which left Libya early Friday with 132 people on board, only to start deflating a few hours later, before overturning. Some 50 survivors were picked up by a Danish container ship, the Alexander Maersk, which was alerted to divert by Italian coastguards and dropped them off on Sunday in Pozzallo, southern Sicily. Representatives of the UN High Commissioner for Refugees (UNHCR) and the International Organization for Migration (IOM) were able to meet them on Monday to hear their accounts. Survivors told them that women and children were among those missing.

At the same time, the bodies of 10 women and one child were found Monday on a beach in Zawiya, 50 kilometres (31 miles) west of Tripoli, according to an official for the Libyan Red Crescent. Then on Sunday seven migrants – a woman and six men – were rescued by Libyan fishermen and coastguards off the coast of the Libyan capital. An IOM spokesman who met them said they had set out on a boat with at least 120 people on board, including about 30 women and nine children. In all more than 6,000 migrants were rescued Friday and Saturday in international waters off the coast of Libya and brought to Italy, while several hundred were rescued in Libyan waters and taken back to Libya.

The number of people leaving Libya in the hope of starting a new life in Europe is up nearly 50% this year compared with the opening months of 2016. With most departures coming in the warm summer months, the trend points to around 250,000 people arriving over the course of 2017. Some 500,000 migrants were registered in Italy in the three years spanning 2014-16.

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Europe’s reputation is tarnished for decades. But everyone thinks they can deflect responsibility. Time for skin in the game.

Hundreds Of Migrants Feared Dead In Mediterranean Over Weekend (R.)

More than 200 migrants are feared to have died in the Mediterranean over the weekend, according to testimony from survivors, and several bodies, including that of an infant, have washed up on a Libyan beach. About 7,500 people have been rescued off the coast of Libya since Thursday, the Italian and Libyan coastguards said. Two groups of survivors told the organizations that hundreds drowned when their rubber boats began to deflate before rescuers arrived. More than 60 are feared dead and three bodies were recovered on Saturday, survivors brought to Sicily on Sunday told Italian coastguards. The boat left Libya carrying about 120, they said. There was some discrepancy in the numbers. Based on its interviews with some of the survivors in Pozzallo, Italy, the U.N. refugee agency estimated the number of dead at more than 80.

Separately, Libya’s coastguard picked up seven survivors over the weekend who said they had been on a boat packed with 170 migrants. Aid agency International Medical Corps, which gave medical care to the survivors, also confirmed their account. “We rescued on Sunday seven illegal migrants – six men and a woman,” said Omar Koko, a coastguard commander in the western city of Zawiya. “According to these survivors, there were 170 on board the boat, which sank because of overloading.” Among those missing were more than 30 women and nine children, Koko said. Eleven bodies washed up on the shore west of Zawiya, said Mohanad Krima, a spokesman for the Red Crescent in Zawiya. “All the bodies are of female victims and there is a girl of less than one year old,” he said.

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Mar 252017
 
 March 25, 2017  Posted by at 9:07 am Finance Tagged with: , , , , , , , , ,  5 Responses »
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Dorothea Lange Drought hit OK farm family on way to CA 1936

 

With Health Bill Down, Trump Can Still Unleash HHS To Bedevil Obamacare (MW)
The Heart Of The American Dream Has Stopped Beating (DiMartino Booth)
Pension Crisis Too Big for Markets to Ignore (Danielle DiMartino Booth)
The Swamp Drains Trump (Jim Kunstler)
It Was A Very Bad Earnings Season (Snider)
Flynn and Turkish Officials Discussed Kidnapping Erdogan Foe From US (WSJ)
A ‘Deaths Of Despair’ Crisis Is Gripping America (BI)
New Canadian Budget Drops Obsession With Balanced Budgets (Star)
US Debt of $20 Trillion Visualized in Stacks of Physical Cash (Demonocracy)
The Pound Is Going To Take A Huge Hit, According To Deutsche Bank (Ind.)
Leaving Euro Would Not Help France And Italy – ECB Chief Economist (Ind.)
Greece to Break Off Face-to-Face Talks With Creditors (BBG)
Where Next For Greece? (Makropolis)

 

 

Big defeat. But not a knock-out. Trump needs better advisers.

With Health Bill Down, Trump Can Still Unleash HHS To Bedevil Obamacare (MW)

In a spectacular turn of events, a shortage of support prompted Republican leadership to pull their health-care plan from a House of Representatives vote on Friday. The move means that the Affordable Care Act, also know as Obamacare, will remain in place “for the foreseeable future,” according to House Speaker Paul Ryan. Democrats, ACA supporters and opponents of the Republican American Health Care Act quickly hailed the development as a victory. But what was a legislative battle now is likely to move into the executive realm and the Department of Health and Human Services, led by longtime ACA opponent Dr. Tom Price. Experts say there is plenty that President Donald Trump’s administration can do to undermine the ACA. And any poor deterioration in the performance of the ACA could give Republicans a new opening: Trump indicated Friday that he might re-visit health care after Obamacare “explodes.”

“It’s going to be interesting to see how they balance the responsibility for ensuring the government functions with their hatred for the law,” said Spencer Perlman, director of health-care research at Veda Partners. “If they want to completely sabotage it they probably could, and call it a self-fulfilling prophecy.” The latter is all the more likely because the ACA works best with the help of administrative support and resources. Think of the ACA as a plant, one that requires light and tending-to, that gets inherited by a downright hostile owner. The best example of this occurred during enrollment for 2017 exchange plans. The months-long enrollment period began under former President Barack Obama’s administration, which passed the ACA, and ended under President Trump’s administration.

Enrollment, which had looked like it was on track to surpass previous years, dropped off following the transition, which many attributed to a dearth of marketing and promotional activity under Trump. Plus, the ACA’s problems — which may have helped elect Trump — still exist. Many insurers, including UnitedHealth, Humana and Aetna have exited the exchanges on which many participants purchase health insurance, contributing to a 25% on average increase in premiums. “The biggest thing that needs to be done is figuring out some way to attract young, healthy people” to exchange plans, Perlman said. But HHS, under Price’s leadership, seems unlikely to try to improve the law. And “purposefully sabotaging the exchanges and the ACA probably isn’t difficult,” said Perlman. And for that matter, HHS is “probably the only game in town right now” that can do it.

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“..55% of mortgages in active foreclosure were originated between 2004 and 2008..”

The Heart Of The American Dream Has Stopped Beating (DiMartino Booth)

According to ATTOM Data Solutions, the new parent company of RealtyTrac, default notices, scheduled auctions and bank repossessions slid to 933,045 last year, the lowest tally since the 717,522 reported in 2006. Is the final chapter written? Not if you live in judicial foreclosure states such as New York, New Jersey and Florida where ‘legacy’ foreclosures take years to clear. At the end of last year, 55% of mortgages in active foreclosure were originated between 2004 and 2008. Factor in what’s still in the pipeline and one in ten circa 2006 homeowners will have lost their homes before it is all said and done. That helps explain one part of the chart below which was generously shared with me by one Dr. Gates. Longtime readers of these missives will recognize the nom de plume of my inside-industry economic sleuth. His first take on this sad visual, was that, “The heart of the American Dream has stopped beating.” Did that stop your heart as it did my own?

As you can see, after a steady 40-year build, owner-occupied housing has stagnated and sits at the lowest level since 2004. This has sent the homeownership rate crashing to 63.4%, the lowest since 1967. It would be nice to think that things were looking up for would-be homeowners. But it’s difficult to be overly optimistic when the local newspaper reports that house flipping in the Dallas-Ft. Worth area rose 21% in 2016, seven times the national rate. In all, 193,000 properties nationwide were flipped for a quick inside-12-months profit last year, a 3.1 increase to a nine-year high. Moreover, the median age of a flipped home rose to a two-decade high of 37 years, about double the median age of homes flipped before the crisis hit. That translated into a median gross profit of $69,624 on a median selling price of $189,900 in 2016, a neat 49.2% margin, the highest on record. Awesome!

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Very good -and scary- from Danielle DiMartino Booth. I’ve often asked: what happened to pension funds investing in AAA paper? But there’s more: without accounting tricks dominoes would already be falling. This is not some coincidence, it’s actual policy as conducted by The American Academy of Actuaries.

Pension Crisis Too Big for Markets to Ignore (Danielle DiMartino Booth)

The question is why haven’t the headlines presaged pension implosions? As was the case with the subprime crisis, the writing appears to be on the wall. And yet calamity has yet to strike. How so? Call it the triumvirate of conspirators – the actuaries, accountants and their accomplices in office. Throw in the law of big numbers, very big numbers, and you get to a disaster in a seemingly permanent state of making. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007. Credit rating firms have begun downgrading states and municipalities whose pensions risk overwhelming their budgets. New Jersey and the cities of Chicago, Houston and Dallas are some of the issuers in the crosshairs.

Morgan Stanley says municipal bond issuance is down this year in part because of borrowers are wary of running up new debts to effectively service pensions. Federal Reserve data show that in 1952, the average public pension had 96% of its portfolio invested in bonds and cash equivalents. Assets matched future liabilities. But a loosening of state laws in the 1980s opened the door to riskier investments. In 1992, fixed income and cash had fallen to an average of 47% of holdings. By 2016, these safe investments had declined to 27%. It’s no coincidence that pensions’ flight from safety has coincided with the drop in interest rates. That said, unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate.

In fiscal 2016, which ended June 30th, the average return for public pensions was somewhere in the neighborhood of 1.5%. Corporations’ accounting rules dictate the use of more realistic bond yields to discount their pensions’ future liabilities. Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions. So why not just flip the switch and require truth and honesty in public pension math? Too many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used.

That would translate into much steeper funding requirements at a time when budgets are already severely constrained. Pockets of the country would face essential public service budgets being slashed to dangerous levels. What’s a pension to do? Increasingly, the answer is swing for the fences. Forget the fact that just under half of pension assets are in the second-most overvalued stock market in history. Even as Fed officials publicly fret about commercial real estate valuations, pensions have socked away 8% of their portfolios into this less than liquid asset class. Even further out on the risk and liquidity spectrum is the 10% that pensions have allocated to private equity and limited partnerships.

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“While the nation remains entertained by all this, the Potemkin financial system will wobble, crash, and burn and the humiliation of Donald Trump will be complete.”

The Swamp Drains Trump (Jim Kunstler)

One can’t help marveling at the way the “Russian interference” motif has shifted the spotlight off the substance of what Wikileaks revealed about Clinton Foundation and DNC misdeeds onto Trump campaign officials “colluding” with Russians, supposedly to support their interference in the election. It’s true that the election is way over and the public is no longer concerned with Hillary or her foundation (which is closing shop anyway). But the switcheroo is impressive, and quite confusing, considering recently retired NSA James Clapper just two weeks ago said on NBC’s Meet the Press that there was “no evidence” of collusion Between Trump and Russia. Okay… uh, say what? On Monday, FBI Director James Comey revealed that his agency had been investigating the Trump Campaign since at least last August. Is that so…? Investigating how? Some sort of electronic surveillance?

Well, what else would they do nowadays? Send a gumshoe to a hotel room where he could press his ear on a drinking glass against the wall to eavesdrop on Paul Manafort? I don’t think so. Of course they were sifting through emails, phone calls, and every other sort of electronic communication. Trump’s big blunder was to tweet that he’d been “wiretapped.” Like the FBI patched into a bunch of cables with alligator clips in the basement of Trump Tower … or planted a “bug” in the earpiece of his bedside phone. How quaint. We also don’t have ice boxes anymore, though plenty of struggling weight-watchers across the land speak guiltily of “raiding the icebox.” But if it’s true, as Mr. Comey said, that the FBI had been investigating Trump’s campaign, the people around him, and Trump himself, since August, how could they not have captured some of Trump’s conversations?

[..] So, the long and the short of it is that the RussiaGate story is spinning out of control, and Trump’s adversaries — who go well beyond Congress into the Deep State — might be getting enough leverage to dump Trump. Either they will maneuver him and his people into some kind of perjury rap, or they will tie up the government in such a web of investigative procedural rigmarole that all the country lawyers who ever snapped their galluses will never be able to unravel it. While the nation remains entertained by all this, the Potemkin financial system will wobble, crash, and burn and the humiliation of Donald Trump will be complete. Abandoned by the Republican Party, isolated and crazed in the White House, tweeting out mad appeals to heaven, he’ll either voluntarily pass the baton to Mike Pence or he will be declared unfit to serve and removed under the 25th amendment.

The after-effects of that will be something to behold: a “lose-lose” for both old-line political parties. The Trumpists will never forgive the Republican Party, and the Democrats will have gained nothing. Don’t let the door bang you on the butt on your way out.

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What a surprise.

It Was A Very Bad Earnings Season (Snider)

With nearly all of the S&P 500 companies having reported their Q4 numbers, we can safely claim that it was a very bad earnings season. It may seem incredulous to categorize the quarter that way given that EPS growth (as reported) was +29%, but even that rate tells us something significant about how there is, actually, a relationship between economy and at least corporate profits. Keynes famously said that we should never worry about the long run for there we will all be dead, but EPS has arrived at the long run and there is still quite a lot of living to do. As late as October, analysts were projecting $29 in earnings for the S&P 500 in Q4 2016. As of the middle of the earnings reports last month, that estimate suddenly dropped to just $26.37. In the month since that time, with the almost all of the rest having now reported, the current figure is just $24.15 – a decline of over $2 in four weeks. Therefore, 29% growth is hugely disappointing because it wasn’t 55% growth as was projected when the quarter began.

It is also the timing of the downgrades that is important as it relates to both “reflation” and the economy meant to support it. All throughout last year, in the aftermath of the near-recession to start 2016, EPS estimates for Q4 (and beyond) were very stable, unusually so given the recent past. That shows us how analysts, at least, were expecting the economy to go once it got past “global turmoil.” It was the “V” shaped rebound typical for past cyclical behavior. But it wasn’t until companies actually started reporting earnings that the belief was tested and then found severely lacking. With just $24.15 for Q4, total EPS was for the calendar year less than $95, the ninth straight quarter below the $100 level. More importantly, on a trailing-twelve month basis, EPS don’t appear to be in any hurry (except in future estimates) to revisit the prior peak of $106 all the way back in Q3 2014.

 

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Like a cheap crime novel: Flynn gets paid $530,000 “on behalf of an Israeli company seeking to export natural gas to Turkey”, and ends up discussing kidnapping Erdogan’s enemy. Oh, and Biden knew about this conversation. So Obama knew too.

Flynn and Turkish Officials Discussed Kidnapping Erdogan Foe From US (WSJ)

Retired Army Lt. Gen. Mike Flynn, while serving as an adviser to the Trump campaign, met with top Turkish government ministers and discussed removing a Muslim cleric from the U.S. and taking him to Turkey, according to former Central Intelligence Agency Director James Woolsey, who attended, and others who were briefed on the meeting. The discussion late last summer involved ideas about how to get Fethullah Gulen, a cleric whom Turkey has accused of orchestrating last summer’s failed military coup, to Turkey without going through the U.S. extradition legal process, according to Mr. Woolsey and those who were briefed. Mr. Woolsey told The Wall Street Journal he arrived at the meeting in New York on Sept. 19 in the middle of the discussion and found the topic startling and the actions being discussed possibly illegal.

The Turkish ministers were interested in open-ended thinking on the subject, and the ideas were raised hypothetically, said the people who were briefed. The ministers in attendance included the son-in-law of Turkish President Recep Tayyip Erdogan and the country’s foreign minister, foreign-lobbying disclosure documents show. Mr. Woolsey said the idea was “a covert step in the dead of night to whisk this guy away.” The discussion, he said, didn’t include actual tactics for removing Mr. Gulen from his U.S. home. If specific plans had been discussed, Mr. Woolsey said, he would have spoken up and questioned their legality. It isn’t known who raised the idea or what Mr. Flynn concluded about it. Price Floyd, a spokesman for Mr. Flynn, who was advising the Trump campaign on national security at the time of the meeting, disputed the account, saying “at no time did Gen. Flynn discuss any illegal actions, nonjudicial physical removal or any other such activities.”

[..] On March 2, weeks after Mr. Flynn’s departure from the Trump administration, the Flynn Intel Group, his consulting firm, filed with the Justice Department as a foreign agent for the government of Turkey. Mr. Trump was unaware Mr. Flynn had been consulting on behalf of the Turkish government when he named him national security adviser, White House press secretary Sean Spicer said this month. In its filing, Mr. Flynn’s firm said its work from August to November “could be construed to have principally benefited the Republic of Turkey.” The filing said his firm’s fee, $530,000, wasn’t paid by the government but by Inovo BV, a Dutch firm owned by a Turkish businessman, Ekim Alptekin.

[..] Mr. Woolsey said he didn’t say anything during the discussion, but later cautioned some attendees that trying to remove Mr. Gulen was a bad idea that might violate U.S. law. Mr. Woolsey said he also informed the U.S. government by notifying Vice President Joe Biden through a mutual friend. [..] Inovo hired Mr. Flynn on behalf of an Israeli company seeking to export natural gas to Turkey, the filing said, and Mr. Alptekin wanted information on the U.S.-Turkey political climate to advise the gas company about its Turkish investments.

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“.. he identified three kinds of suicide: altruistic, anomic, and egoistic. Of the three, the most complicated is anomic suicide. Anomie essentially means the breakdown of social values and norms, and Durkheim closely associated anomic suicide with economic catastrophe.”

A ‘Deaths Of Despair’ Crisis Is Gripping America (BI)

[..] this isn’t the first time that social change has caused self-destructiveness on a mass scale. Indeed, 19th-century French sociologist Emile Durkheim wrote about similar problems in his time, and might refer to the plague of white middle-class mortality we see today as “a state of upheaval.” Of course, the lesson of the 2016 presidential election was that working- and middle-class whites are suffering. What Durkheim offers, though, is the argument for why the newly elected government in Washington — voted in by this very constituency — is getting the solution all wrong. The way to fix this problem is not through less government — but through more. Durkheim’s seminal work, the 1897 book “Suicide,” remains one of the most in-depth examinations of why these situations occur in society, and it is as relevant as ever. Its lessons are an indication that as a country, we are moving swiftly, carelessly in the wrong direction.

The Americans we are talking about are white and middle class. They are aged 45-55. They are losing the battle against heart disease and cancer, and they are succumbing to drugs, alcohol and suicide at rates unseen in modern history or in other developed countries. “The combined effect means that mortality rates of whites with no more than a high school degree, which were around 30% lower than mortality rates of blacks in 1999, grew to be 30% higher than blacks by 2015,” Case and Deaton wrote. The easy thing to say is that these people are suffering from economic and social anxiety and leave it at that. What’s harder to pinpoint is what exactly that means and how to fix it. Economic conditions for minorities in the same social class and in the same communities are as hard, if not harder, than they are for middle class whites. But death rates aren’t increasing for them.

This is where Durkheim comes in. He wrote his work in the midst of another state of upheaval, as industrialization was taking over the world and old economic patterns were falling away. This was the beginning of modern life as we now know it. And it was killing people. Durkheim found that the degree to which a person is integrated in society is inversely correlated to their likelihood to engage in life-threatening behaviors and suicide. In his work, he identified three kinds of suicide: altruistic, anomic, and egoistic. Of the three, the most complicated is anomic suicide. Anomie essentially means the breakdown of social values and norms, and Durkheim closely associated anomic suicide with economic catastrophe. [..] One of the big factors, then, in the increase in substance abuse and suicide among the white middle class could be a decline in the social framework as a result of the rapid economic changes seen over the last few decades.

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We’re getting into Steve Keen territory. At last.

New Canadian Budget Drops Obsession With Balanced Budgets (Star)

I’m intrigued by Modern Monetary Theory, which maintains governments can create (or ‘print’) money to fill public needs and can’t go into debt to themselves, though they should keep an eye on inflation.

Sorry, but I’m afraid I don’t agree that Wednesday’s federal budget was a non-event: “cynical,” a “placeholder,” “bafflegab and buzzwords” — as others wrote. I think this budget rocked, in one sense: it did a 180 on the stifling monomania of the last 30 years. I’m referring to the obsession with deficits. As recently as last election, the Liberals promised a balanced budget by the end of their first term. Now their projected deficits are even higher but that promise is gone and the thought process, transformed. Finance minister Bill Morneau blandly says, they’ll “be responsible every step along the way” and “show a decline in net debt to GDP,” which totally shifts the metric. He might as well have trilled, “Tra-la-la, we really don’t care.” It’s a damn earthquake.

For proof, look not at the opposition – Rona Ambrose predictably called it “spending out of control”- but at the journalists, who were left sputtering. It’s so radical they struggled for words. Peter Mansbridge began interviewing Morneau with: “How does it feel to know you’ll likely never have a balanced budget?” I wish Morneau had said, “I’m fine, but is there anything I can do to help you through this?” Mansbridge couldn’t stop, turning plaintively to his panel: “I tried to get him on the deficit … Is there a right and wrong any more?” Jennifer Ditchburn tried to soothe him with, “Deficit is a word they just don’t use any more.”

If I’m hyperventilating, it’s because I’ve led a cramped existence all these years, bowed under the weight of deficitism since I first heard the phrase, “Yeah, but how ya gonna pay for that?” during the 1988 election. No one knew where it came from or how it usurped all other political concerns, like a missive from heaven, or the Fraser Institute. Paul Martin adopted it, using it to sink the Canada we knew, and his own career. Yet, there’s apparently an ebb and flow to these things: a Nanos poll says Canadians now want Ottawa to run deficits as long as overall debt declines relative to GDP. That’s a pretty sophisticated alteration for ordinary folks to make intuitively; it makes you wonder if someone isn’t pulling strings somewhere and decided to drop a new backdrop (to public discourse) over the previous one.

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Nicely done. Like the music.

US Debt of $20 Trillion Visualized in Stacks of Physical Cash (Demonocracy)

Showing stacks of physical cash in following sequence: $100, $10,000, $1 Million, $2 Billion, $1 Trillion, $20 Trillion The faith and value of the US Dollar rests on the Government’s ability to repay its debt. “The money in the video has already been spent”

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Sounds reasonable.

The Pound Is Going To Take A Huge Hit, According To Deutsche Bank (Ind.)

When it comes to the pound, currency analysts at Deutsche Bank have for months proved to be some of the most bearish across the City, but they’ve just turned even more pessimistic in their outlook for the battered currency. In its latest special report on Brexit released this week, the German lender said the pound could fall as a low as $1.06 against the dollar by the end of 2017, or another 15%. “We do not see sterling (currently) fully pricing a hard Brexit outcome,” the bank wrote. “Combined with limited adjustment in the UK’s current account deficit and slowing growth, we see further downside, and forecast $1.06 in by year-end,” it added.

In an interview with Bloomberg in February, George Saravelos, the German lender’s global co-head of foreign exchange, hinted that the bank could cut its official forecast. He said at the time that sterling could still slip by 16% against the dollar to $1.05 cent as the “incredibly complicated” nature of Brexit becomes ever more clear. Most economists’ forecasts are still more optimistic than Deutsche Bank’s, but few expect the currency to recover from its post-referendum lows any time soon. According to poll of more than 60 banks and research institutions conducted by Reuters that was released earlier this month, forecasters on average expect the currency to trade at $1.23 against the dollar by the end of June, and drop to $1.21 in the subsequent three to six months.

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Praet is a true believer.

Leaving Euro Would Not Help France And Italy – ECB Chief Economist (Ind.)

The chief economist of the ECB has warned Italy and France that their economic problems would not be solved by breaking up the single currency. In an interview with Italy’s Il Sole 24 Ore newspaper, Peter Praet, an executive board member of the ECB, said the idea that the euro was the root cause of high unemployment and low growth in certain European countries was a populist “deception”. “What I do worry about is the populist narrative that things were better before the euro,” he said. “This is a deception. We arrived at monetary union after disastrous experiences with floating exchange rates and some unsuccessful attempts of orderly floating. “The devaluations that populists claim is a free lunch and allows to regain competitiveness by miracle proved extremely expensive.”

With specific reference to Italy, he said: “The nostalgic alternative that everything will be all right just by returning to the lira amounts to fooling the people. The cost of a regime change would be huge and the poor would be the ones that suffer the most.” Mr Praet acknowledged that the euro had lost popularity in many European countries, but said that it had been made a “scapegoat” for other economic policy failures by politicians. However, many credible economists argue that in the absence of fiscal stimulus by core countries in Europe that run current account surpluses, the monetary restrictions of the single currency are indeed driving the economic distress of the likes of France, Italy, Portugal and Greece.

Italy’s Five Star movement, currently leading in national opinion polls, has proposed a referendum on Italy’s membership of the single currency. Marine Le Pen’s Front National in France has previously called for the reinstatement of the franc, although she did not reiterate this in the national debate among presidential candidates earlier this week ahead of April’s national elections. The level of Italy’s GDP is barely higher than when the single currency was formed in 2000 and its working age unemployment rate currently stands at 12 per cent. The French unemployment rate is just below 10% and for young people it is double that.

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An outright lie: “Greece can only do that if Greece has a competitive economy. To that end, it needs to carry out reforms, and we’re giving Greece time to do that.”

Greece to Break Off Face-to-Face Talks With Creditors (BBG)

Greece and the institutions managing its bailout review will break off negotiations in Brussels without having cleared a path to conclude the deliberations that would release needed rescue funds. Finance Minister Euclid Tsakalotos, who was meeting with officials from the euro area and the IMF will return to Athens by Saturday. The two sides still have issues to work out, said the official, who asked not to be named in line with policy. Some progress was made and discussions will continue from their respective headquarters, according to a spokesman from the European Stability Mechanism, the euro-area’s bailout monitor. Greece is edging closer to a repeat of the 2015 drama that pushed Europe’s most indebted state to the edge of economic collapse, as the government in Athens and its creditors disagree over reforms to the pension system and the labor and energy markets.

Greece needs to complete the review in order to get the next portion of its aid payment before it has more than €7 billion of bonds come due in July. German Finance Minister Wolfgang Schaeuble increased the pressure on Prime Minister Alexis Tsipras to accede to creditor demands. “Greece has said it wants to stay in the euro,” Schaeuble said in an interview on Deutschlandfunk radio on Friday. “Greece can only do that if Greece has a competitive economy. To that end, it needs to carry out reforms, and we’re giving Greece time to do that.” [..] European Commission President Jean-Claude Juncker urged Greece and its creditors in an emailed statement to reach a deal that respects commitments made on all sides. In response to Tsipras’s letter, Juncker called on the Greeks not to reverse reforms and creditors “to give Greece the desired and necessary room for maneuver to build its own future.”

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Reasonable overview, but any talk of agreements that could lead Greece back to growth is nonsense. The EU would never sign such an agreement. Theie attitude to date has made that abundantly clear.

Where Next For Greece? (Makropolis)

In September last year, when Alexis Tsipras visited New York to speak at the UN Assembly, he held a meeting with some heavyweights of the international investment community. The Greek prime minister was reportedly advised by the participants that if he wanted to build trust in Greece as an attractive investment destination, he should shift focus from his main objective of debt relief towards ensuring Greece’s participation in the ECB’s QE programme. The investors apparently pointed out to the SYRIZA leader that such a development would have a wide range of benefits for Greece and provide the steadiest path towards regaining market access and the successful completion of the current programme, without the need to follow it up with a fourth memorandum of understanding (MoU).

Tsipras seemingly heeded the advice and, just as the second review was about to start, he charted a path out of the crisis. He set out his intention to close the review by December 2016, secure QE at the start of 2017 and dip his toe back into the markets with a small issue or two early this summer when Greece has to roll over the bond that it issued in 2014, when Antonis Samaras was prime minister. However, the timetable Tsipras identified last autumn has gone up in smoke.

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Mar 262016
 
 March 26, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , ,  1 Response »
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Jack Delano Freight operations on the Indiana Harbor Belt railroad 1943

US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)
World Trade Collapses in Dollars, Languishes in Volume (WS)
Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)
Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)
Yuan’s Fall Drags Down Chinese Companies (WSJ)
Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)
Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)
Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)
Modern Monetary Theory Has Ardent Proponents (SMH)
Brazil Economic Woes Deepen Amid Political Crisis (WSJ)
The River: America’s 40-Year Hurt (BBC)
Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

“The resilient consumer”. Sure.

US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)

While the final revision to Q4 2015 GDP was so irrelevant it was released on a holiday when every US-based market is closed, even the futures, it is nonetheless notable that according to the BEA in the final quarter of 2015 US GDP grew 1.4%, up from the 1.0% previously reported, and higher than the 1.0% consensus estimate matching the highest Q4 GDP forecast. The final Q4 GDP print was still well below the 2.0% annualized GDP growth reported in Q3.

 

The figure marks a slowdown from the 2.2% average pace in the first three quarters of 2015. For all of last year, the U.S. economy grew 2.4% matching the advance in 2014. The reason for the change was largely due to upwardly Personal Consumer Spending, which rose from a contribution of 1.38% to the annualized bottom line to 1.66%. In CAGR terms, personal consumption rose 2.4%, following the 3.0% increase in Q3, higher than the 2.0% previously estimated.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.7% rate, compared with a previously estimated 1.4% pace.  The rest of the GDP components were largely unchanged, with Fixed Investment adding 0.06% to the bottom line, up from 0.02% in the previous estimate, Private Inventories contracting fractionally more than previously estimated (-0.22% vs -0.14%), net trade subtracting 0.1% less from growth (-0.14% vs -0.25%), and finally government spending largely unchanged and hugging the unchanged line at 0.02%.

 

But while the “resilient consumer” once again carried the US economy in the fourth quarter, largely due to an estimated jump in spending on Transportation and Recreational services, which added an annualized $13 billion to the US economy vs the prior estimate, more disturbing was the drop in profits which we already knew courtesy of company reports and is known confirmed by the BEA whose GDP report also showed that corporate profits dropped in 2015 by the most in seven years. As Bloomberg writes, the earnings slump illustrates the limits of an economy struggling to gather steam at the start of this year. Some companies, encumbered by low commodities prices and sluggish foreign markets, are cutting back on investment while a firm labor market and low inflation encourage households to keep shopping.

Pre-tax earnings declined 7.8%, the most since the first quarter of 2011, after a 1.6% decrease in the previous three months. The estimate of nonfinancial corporate profits was reduced by a $20.8 billion settlement, considered a transfer to the government, between BP and the U.S. after the 2010 oil spill in the Gulf of Mexico. Profits in the U.S. dropped 3.1% in 2015, the most since 2008. Corporate earnings are being weighed down by weak productivity, rising labor costs and the plunge in energy prices. Economists at JPMorgan had expected a 9.5% drop in pre-tax earnings in the fourth quarter. “The pace of growth slowed as we ended 2015, though consumer spending is still the primary underpinning of this economic expansion,” Sam Bullard at Wells Fargo in Charlotte, North Carolina, said before the report. “Any pickup we might see is still likely going to be capped given the overall global picture.”

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Globalization is ending.

World Trade Collapses in Dollars, Languishes in Volume (WS)

The Merchandise World Trade Monitor by the CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, tracks global imports and exports in two measures: by volume and by unit price in US dollars. And the just released data for January was a doozie beneath the lackluster surface. The World Trade Monitor for January, as measured in seasonally adjusted volume, declined 0.4% from December and was up a measly 1.1% from January a year ago. While the sub-index for import volumes rose 3% from a year ago, export volumes fell 0.7%. This sort of “growth,” languishing between slightly negative and slightly positive has been the rule last year. The report added this about trade momentum:

“Regional outcomes were mixed. Both import and export momentum became more negative in the United States. Both became more positive in the Euro Area. Import momentum in emerging Asia rose further, whereas export momentum in emerging Asia has been negative for four consecutive months.” This is also what the world’s largest container carrier, Maersk Lines, and others forecast for 2016: a growth rate of about zero to 1% in terms of volume. So not exactly an endorsement of a booming global economy. But here’s the doozie: In terms of prices per unit expressed in US dollars, world trade dropped 3.8% in January from December and is down 12.1% from January a year ago, continuing a rout that started in June 2014. Not that the index was all that strong at the time, after having cascaded lower from its peak in May 2011.

If June 2014 sounds familiar as a recent high point, it’s because a lot of indices started heading south after that, including the price of oil, revenues of S&P 500 companies, total business revenues in the US…. That’s when the Fed was in the middle of tapering QE out of existence and folks realized that it would be gone soon. That’s when the dollar began to strengthen against other key currencies. Shortly after that, inventories of all kinds in the US began to bloat. Starting from that propitious month, the unit price index of world trade has plunged 23%. It’s now lower than it had been at the trough of the Financial Crisis. It hit the lowest level since March 2006:

This chart puts in perspective what Nils Andersen, the CEO of Danish conglomerate AP Møller-Maersk, which owns Maersk Lines, had said last month in an interview following the company’s dreary earnings report and guidance: “It is worse than in 2008.” But why the difference between the stagnation scenario in world trade in terms of volume and the total collapse of the index that measures world trade in unit prices in US dollars? The volume measure is a reflection of a languishing global economy. It says that global trade may be sick, but it’s not collapsing. It’s worse than it was in 2011. This sort of thing was never part of the rosy scenario. But now it’s here.

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‘Explaining’ what they don’t understand themselves.

Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)

The Bank of Japan launched a charm offensive Friday to win over spooked members of the public who have reacted negatively to negative interest rates. The central bank issued a booklet offering a crash course in the basic implications of negative rates, a move that demonstrates the strength of unease created by the introduction of a policy in a nation largely unfamiliar with the concept behind it. Written in a question-and-answer format and in a somewhat casual Japanese, the three-page booklet aims to explain negative rates “in five minutes” by covering 18 issues that have grabbed public attention. Negative rates have become a political hot potato ahead of July’s national elections, with opposition lawmakers accusing the central bank of creating anxiety among consumers. Some ruling party politicians, perhaps feeling uncomfortable about the prospect of explaining the policy to their constituents, are also feeling the jitters.

Prime Minister Shinzo Abe acknowledged Thursday that negative rates have made households nervous and it will likely take some time before people understand them. The Bank of Japan decided to start charging interest on some deposits held by commercial banks at the central bank in January. The policy is part of broader efforts to defeat deflation and create a stronger economy, but the central bank was ill-prepared for the public backlash the policy generated. One of the most common concerns over the policy is whether individuals with regular bank accounts will be charged interest on their deposits at the commercial banks. Opposition lawmakers have frequently quizzed BOJ Gov. Haruhiko Kuroda on this issue in parliament.

“Although the measure is called negative rates, it only involves imposing negative rates on a part of the money deposited at the BOJ by banks,” the booklet says. “Individuals’ deposits are different.” While addressing concerns over the new policy, the central bank also tries to convey the message that Japan must get rid of deflation, a negative cycle of price falls, adding that it has taken the right steps to do just that. “If prices don’t rise because of deflation, this means companies’ revenues don’t increase, and that’s why salaries don’t rise,” the booklet says. Since company earnings have improved a lot during the past three years of monetary easing, firms have started increasing basic pay, it says, adding that salaries will keep rising each year if deflation is overcome.

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“..weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world’s largest debtor nation…”

Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)

USDJPY just had its best week in 2 months, funding bullish momentum and carry trades around the world in the midst of dismal economic data everywhere and tumbling earnings expectations. This "bullish" Yen strength, however, amid China's biggest weekly devaluation in almost 3 months, was ironically driven by drastic investment outflowsrecord sales of Japanese stocks by foreigners (sell JPY), and record purchases of foreign bonds by Japanese investors (sell JPY). Sooner, rather than later, it is obvious that the investment outflows will dominate the carry trades (see Thursday and Friday) and Kuroda and Abe will have a major problem.

Yen was dumped all week…

 

Which provided just enough juice for carry trades to lift Japanese stocks (despite the weakness in data and China's biggest weekly Yuan devaluation in almost 3 months)

 

But notice that the last two days have seen Japanese stocks decouple from USDJPY, perhaps the first glimpse of the investment outflows overwhelming any casino-based carry trades flows.

And this is why… Foreigners sold a record amount of Japanese stocks last week… (implicitly meansing Yen was sold)

 

And Japanese investors fled the insanity of record low yields in JGBs, buying a record amount of foreign bonds last week (implicitly selling Yen again)…

 

So the Yen weakness – which was so bullishly supportive of global equity markets via carry – was in fact a signal of massive investor anxiety fleeing the sinking ship. Peter Pan-ic indeed.

Abe and Kuroda will soon face a major problem as a weaker Yen will signal the exact opposite trade that has been so active since 2012 – weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world's largest debtor nation.

And remember – the devaluation of The Yen has done nothing – NOTHING – to improve exports for Japan…

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It’s all about the dollar.

Yuan’s Fall Drags Down Chinese Companies (WSJ)

A weaker Chinese currency has roiled global markets and heightened worries about the state of the world’s second-largest economy. Now, some Chinese companies are reporting they’ve taken a hit from a depreciating yuan. The yuan fell 5% against the U.S. dollar in 2015, plunging after China’s central bank surprisingly devalued the currency in mid-August. A weaker currency helps the country’s exporters but hurts Chinese companies that pay for raw material in U.S. dollars or need to pay off loans in U.S. dollars. Among those negatively affected are firms that source from outside China, such as milk or food companies, as well as real estate companies that hold a lot of dollar-denominated debt, says Herald van der Linde at HSBC.

This was the case with Hengan International, one of the leading makers of tissue paper in China. The company said in a statement it saw $55.3 million in foreign-exchange losses in 2015 because it pays for raw material in U.S. dollars, holds U.S.-denominated debt and has Hong Kong-based yuan-denominated assets, which dropped in value. This contributed to a decline in tissue sales, it said. Weaker currencies also hurt China’s heavily-indebted real-estate developers. Shanghai-based property developer Shui On Land reported its 2015 profit dropped to 1.77 billion yuan ($272 million) from 2.49 billion yuan ($382 million) a year earlier in large part due to the depreciation of the company’s USD- and HKD-denominated debt. Then there are companies that suffer losses from selling to countries whose currencies have weakened.

Sourcing and logistics giant Li&Fung said 2015 revenue dropped 2.4% on year. The main reason? Foreign-exchange losses from weak European and Asian currencies, it said, since 38% of the company’s business is in non-U.S. markets but it accounts in U.S. dollars. In order to tackle the problem, some companies are looking to shed yuan — or at least get it out of the country. Hengan, the tissue company, has remitted the equivalent of several billion Hong Kong dollars from mainland China to Hong Kong in 2015, and another HK$2 billion in the first quarter of this year, said CFO Vincent Loo in Hong Kong. It is also negotiating with sources to pay them in less time — from 30 to 60 days rather than 90 — just in case the yuan continues to fall.

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Beijing’s ‘vision’ is now limited to short term only.

Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)

Municipal authorities in Shanghai tightened mortgage down payment requirements for second home purchases on Friday, in a move to cool an overheating property market and reduce fears of a bubble. Senior Chinese leaders raised concerns about the country’s overheated housing market during an annual parliament meeting this month, and Shanghai is the biggest city to take action in the wake of the National People’s Congress, which ended a week ago. Under the new rules, home buyers will need to put down 50-70% of the price of a second home, compared to 40% previously, to qualify for a mortgage. “The new measure will have a big impact on market sentiment on both the primary and secondary market; new launches being sold out within one, two hours will not happen again,” said Joe Zhou, head of East China research at real estate services firm Jones Lang LaSalle.

With the new rules, Shanghai also made it harder for non-residents to buy homes in the city, according to a statement issued by the local government. Potential buyers who do not hold local residence permits, or hukou, must have paid social insurance or taxes in Shanghai for at least five years before they can purchase property. Previously the requirement was two years. Shanghai will also increase the supply of small- and medium-sized homes and crack down on property financing by informal financial institutions. Shanghai home prices gained 20.6% in February from a year ago, posting the second biggest gain in the country after the southern city of Shenzhen, where prices soared 56.9%, despite slowing economic growth.

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A world full of housing bubbles. Haven’t we understood how dangerous that is?

Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)

There is no longer a city in the south of England where house prices are less than seven and a half times average local incomes, according to analysis by Lloyds Bank that reveals how the home affordability crisis now stretches far beyond London. “The housing affordability gap has widened to its worst level in eight years,” said the Lloyds analysis, noting that the last time prices were so high was at the very top of the boom in 2008, just before the financial crisis struck. The Lloyds analysis is unique in that it compares local house prices with local earnings rather than national averages. On this measure, the worst house prices are not in London but in other parts of the south-east. Oxford is again identified as the least affordable city in the UK, with average prices at 10.68 times local earnings.

Winchester is a close second at 10.54, with London third at 10.06. Cambridge, Brighton and Bath all have prices that are now nearly 10 times local earnings, while cities such as Bristol and Southampton have prices close to eight times earnings. Wage growth has fallen far behind the rise in house prices, said Lloyds, with affordability worsening for the third successive year. The average home in a city in the UK now costs 6.6 times average local earnings, up from 6.2 last year. In the 1950s and 1960s, buyers could typically find homes with mortgages of three to four times their income. But the Lloyds figures show that there is now just one city in the UK that fits that profile: Derry in Northern Ireland. House prices in the city currently fetch 3.81 times local incomes.

While most of the “most affordable” cities in the Lloyds rankings are in the north, Scotland and Northern Ireland, buyers will still be stretched to afford a home from the local salaries on offer. Hull is widely regarded as a low house price area, yet local residents face having to pay 5.11 times average local incomes to buy a home. Meanwhile, York has joined the ranks of cities in the south in the unaffordability tables, with prices at 7.5 times incomes.

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When crazy ‘conventional’ ideas fail…

Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)

Our economic guardians at Federal Treasury and the Reserve Bank sound increasingly uneasy about some policy choices being made offshore. Since the global financial crisis, quantitative easing has pumped trillions of dollars into major economies with limited success. More recently central banks in Europe and Japan have opted for negative interest rates in a bid to kick-start growth. On Tuesday the Treasury Secretary, John Fraser, pointed out that we’ve now been in an “experimental stage” with monetary policy for more than seven years. “A range of different interventions have been tried with, at least to date, mixed results,” he said. “Sadly, we will have to await the passage of years before we can pass final judgment.” What is clear, warned Fraser, is that these unusual policies “have had a pervasive and frankly quite worrying impact on the pricing of financial risk.”

Earlier this month the Reserve’s deputy governor, Philip Lowe, said it was “very rare” for central banks to worry that inflation is too low. “Yet today, we hear this concern quite often, and the ‘unconventional’ has almost become conventional,” he said. Lowe warned the abnormal monetary policies being adopted in some countries were “a complication for us” because they put upward pressure on exchange rate. But in a world where traditional economic remedies are proving ineffective a swag of other unorthodox policy suggestions are getting a hearing. One controversial option being canvassed by experts is for central banks to deliver “helicopter drops” of cash directly to citizens’ bank accounts in the hope they will spend it and revive growth. Even more radical is a proposal for governments to mandate an across-the-board pay rise for workers.

Olivier Blanchard, a former chief economist at the IMF, and Adam Posen, president of the Peterson Institute for International Economics, recently recommended the Japanese government try this approach to boost growth. The Bank of England’s chief economist, Andy Haldane, raised eyebrows last September when he argued abandoning cash altogether would make it easier for central banks to manage downturns. He warned that in future it might be necessary for central banks to opt for negative interest rates when depositors are charged for putting their money in the bank in a bid to encourage spending. One problem with that strategy, however, is that people are likely to convert deposits into cash. Eliminating cash and replacing it with a government-backed digital currency would remove that option. “This would preserve the social convention of a state-issued unit of account and medium of exchange… But it would allow negative interest rates to be levied on currency easily and speedily,” Haldane said.

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A second part from the article above.

Modern Monetary Theory Has Ardent Proponents (SMH)

As central banks struggle to revive growth, attention has shifted to fiscal policy the way governments use taxation and spending to influence the economy. Even the hard-heads at the IM have advised governments, including Australia’s, to spend more especially on infrastructure. The fund’s most recent assessment of our economy said “raising public investment (financed by borrowing, thus reducing the pace of deficit reduction) would support aggregate demand, take pressure off monetary policy, and insure against downside growth risks.” Amid these debates about fiscal policy, a radical school of thought called Modern Monetary Theory, or MMT, has gained more prominence. Proponents of this theory have been on the periphery of mainstream economics for more than two decades but their profile has been raised by this year’s US presidential race.

Academic economist Stephanie Kelton , a leading advocate of MMT, is an adviser to presidential hopeful, Senator Bernie Sanders. Kelton calls herself a deficit “owl” rather than a deficit hawk or dove. The hawks, of course, have a straightforward view of government finances: deficits are bad. The doves say deficits are necessary when economic times are tough but they should be balanced by surpluses over time. But deficit owls like Kelton have a far more radical take: deficits don’t matter. The starting point for Modern Monetary Theory is that a currency issuing government can keep printing and spending money but never go broke, so long as it doesn’t borrow in a foreign currency. The Australian Commonwealth, for example, will never run out of Australian dollars because it is a monopoly issuer of that currency.

It can always create the money it needs and, therefore, will always be able to service debts. The MMTers claim that in the modern era of floating exchange rates and deregulated financial markets, governments can, and should, run deficits whenever they are needed. There is a strong moral case for this: in a modern economy, there’s no good reason to have unemployed labour or capital. For the MMTers mass unemployment is a great evil and its daily, human cost dwarfs other economic challenges. They acknowledge there are limits to government spending. Resources in the real economy can be constrained and taxes are an essential tool to ensure demand for the currency and to cool the economy if it overheats. But there’s plenty of scope for governments to print and spend money without causing inflation or triggering a financial crisis. MMTers say sophisticated modern economies like the US and Australia are in no danger of the hyper-inflation which plagued Zimbabwe last decade or Germany’s Weimar Republic in the 1930s.

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Barely functioning, politically nor economically.

Brazil Economic Woes Deepen Amid Political Crisis (WSJ)

Brazil’s economic crisis is as bad as its political one. Latin America’s biggest economy appears headed for one of its worst recessions ever. It stalled in 2014, shrank 3.8% last year and now faces a similar contraction this year. Unemployment rose to 9.5% on Thursday as wages fell 2.4%, both trends forecast to worsen. One in five young Brazilians is out of work, and Goldman Sachs says Brazil may be facing a depression. The deteriorating outlook forms a dire backdrop for Brazil’s political straits. President Dilma Rousseff, deeply unpopular, faces impeachment proceedings in Congress amid a widening corruption scandal surrounding the state oil company, Petróbras. That situation is consuming so much energy from policy makers and Congress that the economic downturn isn’t getting the attention it needs, observers say.

“The gravity of the situation is this: We have the kind of problems where if nothing is done, things will definitely get worse,” said Marcos Lisboa, a former finance ministry official who is now president of the Insper business school in São Paulo. “Pretty soon we could be talking about the solvency of the federal government.” Brazil fended off the results of the 2008 global downturn with stimulus spending, and is trying to again inject money into the economy to spur demand. In January, the Rousseff administration unveiled some $20 billion of subsidized loans from state-owned banks such as the BNDES to boost agriculture and builders of big infrastructure projects.

But this time, the country has less leeway to fund stimulus measures. Brazil’s tax take is diminishing, and the Planning Ministry said Tuesday the government needs to cut around $5.9 billion of spending to meet its budget target. On Thursday, Finance Minister Nelson Barbosa asked Congress to loosen the target to allow a bigger deficit in 2016. Some investors say stimulus policies such as cheap credits from state banks haven’t done much long-term good, because they produced big deficits and the money was often poorly invested in money-losing dams and refineries.

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“..very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t.”

The River: America’s 40-Year Hurt (BBC)

Bruce Springsteen is coming to London with the River tour. At £170 for the cheapest pair, I can’t afford to see the Boss any more, even if my body could handle standing on Wembley Stadium’s pitch for three-and-a-half-hours in an early June drizzle. It’s interesting that Springsteen is re-exploring The River album again. Whenever the anger that simmers in America erupts and reminds the rest of the world that the country is troubled, he seems to be the cultural figure whose work offers an explanation. In late 1986, midway through Ronald Reagan’s second term of office, with the twin scourges of Aids and crack racing through American cities and New Deal ideas of economic and social fairness consumed by the Bonfire of the Vanities taking place on Wall Street, Britain’s Guardian newspaper ran an editorial that said, “for good or ill, [America] is becoming a much more foreign land”.

I had just celebrated my first anniversary as an ex-pat in London and wrote an essay trying to explain what America was like away from the places Guardian readers knew. I described the massive population dislocations that followed the long recession that had begun in the mid-70s. I referenced Springsteen. The piece ran under the headline “Torn in the USA”. Now America is going through even worse ructions. But there is nothing fundamentally new. What we are seeing is the continuation of a disintegration that began forty years ago around the time Springsteen was writing the title song of the album. The River, which came out in 1980, was very much about guys trying to kick back at father time and stave off the inevitable arrival of life’s responsibilities – wife, kids, job, mortgage – and the equally probable onset of life’s disappointments in wife, kids, job, mortgage, and in oneself.

The title track is a long, mournful story about that process and the narrator’s desire to reconnect to the person he was when younger and full of hope. “I come from down in the valley / Where mister, when you’re young / They bring you up to do/like your daddy done…” The key point is being brought up to be like your father. Work the same job, carry yourself in the same way, do the right thing. In the song this tie that binds is seen as restricting the choices you can make in life. Your daddy worked in a steel mill, you will work in a steel mill, or on the line at River Rouge, or down a mine. Today, what wouldn’t many of us give for the economic and social stability that gave resonance to Springsteen’s lyrics? A union job, 30 years of work, a pension. Sounds sweet. The narrator of the song goes on to tell us, “I got a job working construction at the Johnstown company / but lately there ain’t been much work on account of the economy.”

Springsteen based the song on the struggle of his brother-in-law to stay employed during the bleak days after the Oil Shock of 1973: a half-decade of inflation and economic stagnation. At the time this stagflation was seen as a cyclical event, the economy would rebound soon. It would be boom time for all. The economy did rebound, but then went into recession in 1982, and rebounded and went into recession at regular intervals, until the near-death experience of 2007/2008. But very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t. Median salaried workers’ wages stagnated. Those working low-wage jobs saw their incomes decline. As for job security, a perfect storm of automation, declining union power, and free-trade agreements put an end to that.

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All the time I’m thinking someone must stand up and say ‘till here and no further’. But instead, Europe tumbles to new lows on a daily basis.

Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

Even before it became a holding pen, Moria was a pretty poor registration centre, unable to provide basic facilities and painfully slow to process the thousands of refugees and migrants who arrive on the shores of Lesbos every week. But since midnight on Sunday, when the new EU-Turkey migrant deal came into force, refugees have been picked up by the coastguard and transported directly to Moria by the Greek authorities. The camp has become an open-air prison, a compound of temporary buildings on a hill overlooking the coast of this island, not far from Turkey’s Mediterranean coast. It is to here that all arrivals must wait for the news their long struggle to reach Europe will almost certainly get them no further than the Greek islands.

They will be returned to Turkey, which the EU has now declared a safe country, in its bid to stem the biggest refugee crisis since the Second World War. The lightning fast implementation of the deal, signed last Friday, has stretched to the limit the capacity of the Greek government, which has no means to process the asylum claims that everyone who arrives has the right to make. Those who came looking for peace and a better life have instead found themselves locked up, and handed detention papers. In response, aid agencies have dropped out of their involvement at the centre one by one, refusing to be associated with the detention of migrants – among whom are more than 100 unaccompanied children. Oxfam this week said the development was “an offence” to Europe’s values.

“They have told us nothing,” says Naima Abdullah, 28, speaking through the chain link fence, her four-year-old daughter Mirna by her side. She paid $2,000 for herself, Mirna, and her one-month-old baby to cross the sea from Turkey after fleeing air strikes in rural Damascus three months ago. She arrived on Sunday, in the first boats after the deal came into force. But four days later, she still hadn’t been given an opportunity to register a claim for asylum. And as the numbers grow, observers worry the only possible outcome will be the mass expulsions Europe has promised to avoid. Nadine Abuasil, 25, said she came to Lesbos because life in Turkey since she fled Deraa in Syria a month ago was not worth living. Her family were blackmailed for money by local gangs, and there was no work in a country that is expensive to live in. “We cannot go back to Turkey,” she says simply.

She and her 23-year-old brother arrived on Sunday after a five hour boat journey during which two men died. They had apparently suffocated. She points to the ground of the detention centre. “We would rather die here than in Turkey.” Her brother, Mohammed, was no less emphatic when asked what he’d do if he was forced to return. “I don’t speak English,” he says. “But: kill myself, kill myself.” The deal has been decried by human rights groups and legal experts who question if Turkey can be considered a safe third country for the forcible return of migrants, and if Greece, which has floundered under the pressure of more than one million refugees arrivals in the past year, is capable of processing asylum claims – even with promised outside help.

“Greece has effectively been asked to build an asylum system in two weeks,” says Camino Mortera, a research fellow for the Centre for European Reform and a specialist in EU law. “The EU claims there won’t be returns en masse but if you are not able to process people in a regulated fashion, how else are they going to deal with this?”

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