Jul 142014
 July 14, 2014  Posted by at 7:05 pm Finance Tagged with: , , , ,  7 Responses »

Jack Delano Shopton locomotive shops, Fort Madison, Iowa March 1943

The insanity doesn’t just continue, it intensifies. The overriding idea is still that the more companies and individuals borrow, the better the economy goes. But that is nowhere near true. It may have been at some point in the past, but not now, not with debt levels at historic highs. Today’s problem is not that there is not enough credit or money available, as central banks try to make you believe, but that people are not spending what they have. Individuals are either maxed out or scared to be left with nothing, and companies see no opportunities for investing in productive projects (besides, they may well be maxed out too).

Credit can play a functional and beneficial role in a society if an individual or company borrows at 5% and puts the money to work towards the production of something with an added value of 10%. That works, because the risk is real. At a 5% rate, you know you will need to do actual work to pay back your loan. And a 10% return means there are things to invest in that are productive. A 1% rate only papers over the fact that there are no productive investment opportunities left, and that they need to be created artificially to prevent the public from finding that out. The entire economy seems to take place on paper – or screens – only. But that’s of course an illusion. We need physical food and physical shelter.

Credit is neither beneficial not functional when companies borrow at 1% and only buy back their own shares or purchase/merge with competitors. Companies today don’t borrow because they feel optimistic about the economy, they don’t borrow because they see productive opportunities at the horizon. They do so only because, to paraphrase Obama, they can. And because financial trickery is the only way to make people think they are healthy.

In the present circumstances what this means is that because debt nevertheless increases at a rapid clip, the economy deteriorates just as fast. And you won’t like what you see when we come out at the other end. The economy is completely hollowed out from the inside, while we’re looking only at the facade. That’s why there no longer is a connection between economic performance and stock markets. In fact the stock markets have become the de facto economic performers. But nothing is being produced, or at least not nearly enough. And not nearly enough is being bought to keep the wheels spinning either.

Today it was announced that Eurozone industrial production fell 1.1%, but stocks just keep on rising. And much more of the same is in the pipeline:

Draghi Seen Delivering $1 Trillion Free Lunch to Banks

Mario Draghi’s newest stimulus tool will hand banks more than €700 billion ($950 billion) of cheap funding, economists say. The European Central Bank president’s targeted lending program for banks will boost credit for the real economy as planned, and at the same time help keep the financial system flush with cash, according to the Bloomberg Monthly Survey of 45 economists. Draghi may address the topic today when he testifies at the European Parliament in Strasbourg for the first time since elections in May. The ECB has identified lending to companies and households as a key weakness in the euro area’s fragile recovery.

The so-called TLTRO program, part of a wider package of measures announced in June, offers as much as four years of low-cost funding tied to bank lending that Draghi said this month could ultimately provide as much as €1 trillion. “The take-up should be large – the money is cheap and banks should feel no stigma about accepting a free lunch,” said Alan McQuaid, chief economist at Merrion Capital in Dublin, who predicts banks will take the maximum available. “With any luck, Draghi’s next problem will not come until 2018, when €1 trillion needs refinancing.”

The ECB is blind or borderline criminal. Blind, because lending is not the key weakness, spending is. Borderline criminal, because by treating lending the way it does, it pushes European economies ever further into their separate and shared quagmires. The net effect of its actions is that what it has labeled ‘systemic banks’ get to survive for another day, but with the trillions of debt hidden in these banks, that survival, if you want to call it that, can – of necessity – only be temporary. And that temporary extension of ‘life’ comes at a great price to the rest of the economy, where people such as you and I reside.

The reason the ECB and the Fed are involved in these highly dubious actions, and have been from 7 years running now, can only be this: they know – or at least strongly fear – that the debts in the banks are so enormous they could make the entire economic system wobble if not crumble, and the ‘leaders’ don’t want to touch that with a 10-lightyear pole. In doing what they do, however, they are throwing away a bit more of your children’s futures every day. For 7 years now.

China’s policies are much like those in the west, but the underlying reasoning in somewhat different. China has undertaken its $25+ trillion stimulus not just for its – state-owned – banks, but for its entire economic system. Catching the fall of an economy that grows, or used to grow, at double digit annual rates is not the same as propping up one that used to grow at 2-3%. The difference lies in the expansion. China’s meteoric expansion brought it a lot of seemingly positive things, but much of it was realized through a highly leveraged and increasingly shadow bank financed system (if you can call it a system).

When Lehman and Bear Stearns happened, Beijing decided to open the spigots, and it hasn’t looked back since. And why should it when Europe and the US didn’t either? There are tens of thousands of Xi’s and Li’s who have nightmares of having their heads chopped off by angry mobs when the latter find out that the whole expansion was nothing but a magic trick from the very start. Like Draghi and Yellen and Merkel and Obama, they’re hell bent on keeping up appearances as long as they can, or at least until they’re out of office.

China exports the inflationary expansion of its money supply, and the Chinese use this virtual yuan to buy up real assets in the real economies of America, Europe and Africa. In the rich world, the idea is that this is alright, because it drives up general price levels, and therefore leaves the impression that economies are doing well. But in the meantime, your world, and the homes and companies around you, are being bought up with what amounts to little more than Monopoly money. Then again, that’s what your own money has become too.

Secret Path Revealed for Chinese Billions Overseas

For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets including New York, Sydney and Vancouver despite their country’s currency restrictions. Now, one way they could be doing it is clearer. Last week, when China Central Television leveled money-laundering allegations against Bank of China Ltd., the state-run broadcaster’s report prompted the revelation of a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.

Offered by some banks in the southern province of Guangdong, across the border from Hong Kong, the trial program was introduced in 2011 for overseas property purchases and emigration and doesn’t constitute money laundering, Bank of China said in a July 9 statement. The transfers were allowed by regulators and reported to them, the bank said. “What it shows is the government has been trying to internationalize the renminbi for a lot longer than we thought,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Ltd., said by phone, using the official name for China’s currency and referring to policy makers’ long-stated goal of allowing the yuan to become freely convertible with other currencies. “I’m rather encouraged by this news because this is the way they need to go.”

Even the BIS, Bank for International Settlements, which should certainly not,at any time and in any way, be confused with the Salvation Army, starts waving bright red alarm banners about what goes on. And though I do know that they’re much closer to Draghi and Yellen then they are to you and me, it’s still interesting to see some of what they have to say, courtesy of Ambrose Evans-Pritchard:

BIS Chief Fears Fresh Lehman From Worldwide Debt Surge (AEP)

The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned. Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield. [..]

Mr Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis. Debt ratios in the developed economies have risen by 20 percentage points to 275% of GDP since then.

Companies are borrowing heavily to buy back their own shares. The BIS said 40% of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007 [..] The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West.

Their debt ratios have risen 20 percentage points as well, to 175%. Average borrowing rates for five-years is 1% in real terms. This is extremely low, and could reverse suddenly. “We are watching this closely. If we were concerned by excessive leverage in 2007, we cannot be more relaxed today,” he said.

Volatility has dropped to an historic low. European equities have risen 15% in a year despite near zero growth and a 3% fall in expected earnings. The cyclically-adjusted price earnings ratio of the S&P 500 index in the US reached 25 in May, six points above its half-century average.

Emerging markets have racked up $2 trillion in foreign currency debt since 2008. They are a much larger animal than they were during the East Asia crisis of the late 1990s, so any crisis would do more damage. “The ramifications would be particularly serious if China, home to an outsize financial boom, were to falter,” it said. BIS officials doubt privately whether China can avoid a ‘hard landing’, fearing that the extreme credit growth over the last five years must lead to a financial reckoning.

“Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent,” it said.

Basel’s lonely call for discipline pits it against the Fed, the Bank of Japan, the Bank of England, and even Frankfurt these days. It prompted an unusually piquant riposte from London earlier this month. “Has monetary policy aided and abetted risk-taking? I hope so. That’s why we did it,” said the Bank of England’s chief economist Andy Haldane. “It is good to have the debate,” said Mr Caruana gamely. Yet he refuses to back down. “There is something strange about fighting debt by incentivizing more debt.”

Just as vulnerable to a financial crisis as in 2007, but with far higher debt ratios. In many ways more fragile than in the build-up to the Lehman crisis. 40% of syndicated loans are to sub-investment grade borrowers (i.e. a hair short of subprime). And indeed, “There is something strange about fighting debt by incentivizing more debt.” In fact, not so much strange as it is stupid, blind, or criminal.

It would be good if we all realize one thing: there is no economic growth; the only thing that grows is the debt (aka credit). If time is money, then we are borrowing money to borrow time. But time is not money: it doesn’t grow, you can’t get more of it, and when you waste it, you can’t get more of it; once spent, it’s gone.

In other words, we can’t really borrow time, that’s as much of a delusion – intentional or not – as debt being able to cure or economic ills today. And because we continue to borrow more, and then even more, anyway, our economies must necessarily deteriorate as fast as we borrow. Just not at the same rate for everyone: corporations can borrow at 1%, but you can’t.

So if present policies serve one purpose after all, it’s to increase inequality. Still, when it comes to inequality, you ain’t seen nothing yet; just wait and see what happens when interest rates start to rise and all the debt must be serviced. The too big to fail banks won’t be called upon to do that, it would make them fail; instead, you and yours will have the honor.

BIS Chief Fears Fresh Lehman From Worldwide Debt Surge (AEP)

The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned. Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield. “Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he told The Telegraph. Mr Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis. Debt ratios in the developed economies have risen by 20%age points to 275pc of GDP since then.

Credit spreads have fallen to wafer-thin levels. Companies are borrowing heavily to buy back their own shares. The BIS said 40pc of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors. The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West. Their debt ratios have risen 20%age points as well, to 175pc. Average borrowing rates for five-years is 1pc in real terms. This is extemely low, and could reverse suddenly. “We are watching this closely. If we were concerned by excessive leverage in 2007, we cannot be more relaxed today,” he said. “It may be the case that the debt is better distributed because some highly-indebted countries have deleveraged, like the private sector in the US or Spain, and banks are better capitalized. But there is also now more sensitivity to interest rate movements.”

Read more …

Old Buddhist conundrum: if traders are broke, are they still traders?

Traders Flood US With $3.4 Trillion of Bond-Auction Demand (Bloomberg)

The intensifying debate over when the Federal Reserve raises interest rates is little more than a sideshow when it comes to the ability of the U.S. to borrow. For all the concern fixed-income assets will tumble once the central bank boosts rates, the Treasury Department still managed to get investors to submit $3.4 trillion of bids for the $1.12 trillion of notes and bonds sold this year, according to data compiled by Bloomberg. That represents a bid-to-cover ratio of 3.06, the second-highest on record and up from 2.88 in all of last year. Attracting investors is critical for the U.S. as it finances a debt load that has more than doubled to almost $18 trillion since before the financial crisis. The appeal of Treasuries was on display last week as benchmark 10-year notes rallied the most since March while investors sought a haven amid rising concern over the health of a Portuguese bank.

“There are still plenty of needy buyers,” William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a July 8 telephone interview. “We’ve seen it from all sources,” said O’Donnell, whose firm one of the 22 primary dealers of U.S. debt obligated to bid at Treasury auctions. Behind the demand is speculation the global economy isn’t growing fast enough to allow central banks to easily withdraw from loose monetary policies that have supported bond markets around the world. Barclays Plc, another primary dealer, cut its forecast for worldwide gross domestic product on July 11 to an increase of 3.1% at an annual rate this quarter from 3.4%. U.S. banks own more than $1.9 trillion of U.S. government and agency securities, up from $1.2 trillion in 2008, Fed data show. Foreign investors hold a record $5.96 trillion, more than double their stake of six years ago.

Read more …

Draghi Seen Delivering $1 Trillion Free Lunch to Banks (Bloomberg)

Mario Draghi’s newest stimulus tool will hand banks more than €700 billion ($950 billion) of cheap funding, economists say. The European Central Bank president’s targeted lending program for banks will boost credit for the real economy as planned, and at the same time help keep the financial system flush with cash, according to the Bloomberg Monthly Survey of 45 economists. Draghi may address the topic today when he testifies at the European Parliament in Strasbourg for the first time since elections in May. The ECB has identified lending to companies and households as a key weakness in the euro area’s fragile recovery. The so-called TLTRO program, part of a wider package of measures announced in June, offers as much as four years of low-cost funding tied to bank lending that Draghi said this month could ultimately provide as much as €1 trillion.

“The take-up should be large – the money is cheap and banks should feel no stigma about accepting a free lunch,” said Alan McQuaid, chief economist at Merrion Capital in Dublin, who predicts banks will take the maximum available. “With any luck, Draghi’s next problem will not come until 2018, when €1 trillion needs refinancing.” Lenders probably won’t take the full amount, the survey shows. They’ll borrow €305 billion in the first TLTRO rounds this year, compared with an ECB cap of about €400 billion, according to the median estimate of economists. That’ll rise to €710 billion after quarterly operations in 2015 and 2016 tied to new loans, the survey shows. Three-quarters of respondents said the measure will increase credit provision to companies and households in the euro-area periphery. The loans are charged just above the ECB’s benchmark interest rate, currently at a record-low 0.15%.

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Yada yada.

Europe Needs $795 Billion Problem Property Loan Solution (Bloomberg)

European banks and asset managers plan to sell or restructure €584 billion ($795 billion) of riskier real estate as they try to clean up their balance sheets, Cushman & Wakefield Inc. said. The region’s lenders, asset managers and bad banks, such as Spain’s Sareb, sold €40.9 billion of loans tied to property in the first six months, 611% more than a year earlier, the New York-based broker said in a report today. Transactions will reach a record €60 billion this year, Cushman & Wakefield estimates. Lenders such as Royal Bank of Scotland Plc are accelerating loan-portfolio sales as borrowing costs fall from a year ago and economic sentiment improves. Lone Star Funds and Cerberus Capital Management LP are among U.S. investors that are taking advantage as sellers opt to offer bigger groups of loans, making it more difficult for smaller firms to make purchases, Cushman & Wakefield said.

“U.S. investors have raised an enormous volume of capital targeting opportunistic real estate,” Frank Nickel, executive chairman of Cushman & Wakefield’s EMEA corporate finance group, said in a statement. “‘Mega-deals’ prove popular to these buyers since they offer a chance to gain large exposures to key assets and markets in one transaction, saving on both costs and time.” The average size of loan-sale transactions in the region increased to €621 million in the first half from €346 million a year earlier, according to the report.

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Done deal.

Gallup Slams Lid On Hopes For US Economy (WolfStreet)

Consumers are “straining against rising prices on daily essentials” and are cutting back on things they want to buy. “If there was any doubt that the US economy is still struggling to get back on its feet, the results of this poll reinforce that reality.” Consumers are “straining against rising prices on daily essentials to afford summer travel, dining out, and discretionary household purchases – the kinds of purchases that ordinarily keep an economy humming.” That’s what Gallup found when it used a new survey to dive deeper into consumer spending.

Its regular monthly survey has been mixed. The average dollar amount consumers spent in June swooned to $91 per day from $98 in May, after a crummy January-April period ranging from $78 to $88 per day. The May spurt seems to have been an outlier that had given rise to a lot of speculation consumers would finally hit “escape velocity,” now obviated by events. But from 2012 until late last year, the averages had been rising. So Gallup dove deeper into the issue with its new survey conducted in mid-June to sort through what consumers are spending more or less money on. And what it found was that they’re buying a little more – “just not the things they want.” They’re spending more on things they have to buy, and in many instances they’re spending more in these categories because prices have jumped. At the top of the list: groceries.

Groceries: 59% spent more, 10% spent less.
Gasoline: 58% spent more, 12% spent less
Utilities: 45% spent more, 10% spent less
Healthcare: 42% spent, 8% spent less
Toilet paper and other household goods: 32% spent more, 5% spent less
Rent, the biggie: 32% spent more, 9% spent less.

These categories are household essentials. They’re on top of the priority list. And in order to meet the requirements of these items, consumers are cutting back where they can. Gallup found that “the increasing cost of essential items is further constraining family budgets already hit hard by the Great Recession and still reeling from a stagnant economy.” Hence, the less essential the expense, the more it got cut. Here is the bottom of the list, which explains part of the recent retail woes:

Retirement savings: 18% spent more, 17% spent less.
Leisure activities: 28% spent more, 31% spent less
Clothing: 25% spent more, 30% spent less
Consumer electronics: 20% spent more, 31% spent less
Travel: 26% spent more, 38% spent less
Dining out: 26% spent more, 38% spent less

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That’s one way to put it.

Americans Are Living The Dream, But Not Loving It (CNBC)

A new survey shows most Americans feel they aren’t living the American dream, despite being wealthier and more educated than ever. The study, conducted by the marketing firm DDB, found that only 40% of American adults believed they were living the dream. However, 66% of Americans owned a home, 78% received a good education, and 74% said they’ve found a decent job—all widely believed to be part of the American dream. The disconnect may be because achieving and maintaining the American dream have become so difficult that people are not enjoying it, said Mosche Cohen, former professor at Columbia Business School. People are trying to “shoehorn themselves into this concept of the American dream, and they are losing the freedoms it’s supposed to provide,” he said in an interview with CNBC’s “Power Lunch.”

Americans may work hard in school, get a good job, marry, and buy a home, but fast-forward a few years and they may find themselves with children, living in a home that is now too small, clinging to a job they don’t love anymore, and living paycheck to paycheck. “They’re living the dream, but they’re not loving it anymore,” Cohen said. According to Diana Elliott from Pew Charitable Trusts, which conducts similar studies, achieving the American Dream comes down to financial security and wealth. “Americans are not feeling as [financially] secure as perhaps they were before the Great Recession,” she said. “The American dream is really about having a little bit extra at the end of the month and being able to springboard … your children into the future.”

Read more …

Sign of the end?!

Individuals Pile Into Stocks as Pros Say Bull Is Spent (Bloomberg)

Main Street and Wall Street are moving in opposite directions. Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute. The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.

“If Wall Street, after poring over all known data, comes up with a target and we’re already there, and you still see individual investors buying and they’re typically the ones that are late to the party, it would seem there is limited upside,” Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a July 8 phone interview. U.S. stocks slid from record highs last week, sending the Standard & Poor’s 500 Index to the biggest drop since April, amid concern over financial stress in Europe and the timing of higher U.S. interest rates. The Chicago Board Options Exchange Volatility Index jumped 17% from a seven-year low.

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But they’re broke.

Economy Needs Consumers To Chip In (MarketWatch)

The U.S. economy is revved up and ready to go by most measures except for, perhaps, the most critical one: The consumer. And that’s a problem. Consumer spending is the fuel that runs a modern economy. Oh sure, businesses have to invest and hire to get the party going, but consumer spending generates more than two-thirds of the nation’s economic activity. When they spend more, businesses hire and invest more. Yet since the recession ended in mid-2009, consumers have been unusually shy. Americans are only spending about two-thirds as much as they used to and that’s kept U.S. growth well below its historical norm. Meager wage gains, a devastated labor market and deep scars from the Great Recession clearly played a part in suppressing the urge or ability to spend.

As of May consumer spending is climbing at just a 2.9% annual pace, the slowest rate in five years. And a key bellwether of whether Americans are spending more, retail sales, hasn’t show much pop. “For the economy to really kick into the next gear, we need the consumer to do more of the heavy lifting,” said Ryan Sweet, senior economist at Moody’s Analytics. “For many consumers it still feels like a recession.” The retail sales report for June, released Tuesday, could offer further clues on whether consumers are starting to feel more optimistic. Economists predict sales will rise by a healthy 0.6%, but more important is whether other sectors aside from fast-growing auto and Internet retailers show renewed strength. Many of them have lagged behind in 2014.

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Very interesting.

How Capital Captured Politics (Guardian)

In May, an international trade agreement was signed that effectively serves as a kind of legal backbone for the restructuring of world markets. While the Trade in Services Agreement (Tisa) negotiations were not censored outright, they were barely mentioned in our media. This marginalisation and secrecy was in stark contrast to the global historical importance of what was agreed upon. In June, WikiLeaks made public the secret draft text of the agreement. It covers 50 countries and most of the world’s trade in services. It sets rules that would assist the expansion of financial multinationals into other nations by preventing regulatory barriers. It prohibits more regulation of financial services, despite the fact that the 2007-08 financial meltdown is generally perceived as resulting from a lack of regulation. Furthermore, the US is particularly keen on boosting cross-border data flow, including traffic of personal and financial data. Despite all this, we heard little about it. [..]

The main culprits of the 2008 financial meltdown now impose themselves on us as experts leading us on the painful path to financial recovery. Their advice should trump parliamentary politics. Or, as Mario Monti put it: “Those who govern must not allow themselves to be completely bound by parliamentarians.” What, then, is the higher force whose authority can suspend the decisions of the democratically elected representatives of the people? As far back as 1998, the answer was provided by Hans Tietmeyer, the then governor of the Deutsche Bundesbank, who praised national governments for preferring “the permanent plebiscite of global markets” to the “plebiscite of the ballot box”. Note the democratic rhetoric of this obscene statement: global markets are more democratic than parliamentary elections, since the process of voting goes on in them permanently (and is permanently reflected in market fluctuations) and at a global level, not only within the limits of a nation state.

This, then, is where we stand with regard to democracy, and the Tisa agreement is a perfect example. The key decisions concerning our economy are negotiated and enforced in secret, and set the coordinates for the unencumbered rule of capital. In this way, the space for decision-making by the democratically elected politicians is severely limited, and the political process deals predominantly with issues towards which capital is indifferent (like culture wars). This is why the release of the Tisa draft marks a new stage in the WikiLeaks strategy: until now its activity has been focused on making public how our lives are monitored and regulated by the intelligence agencies – the standard liberal topic of individuals threatened by oppressive state apparatuses. Now another controlling force appears – capital – which threatens our freedom in a much more twisted way: by perverting our very sense of what the word means.

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‘Politics and Mafia Are Same Thing’ (Quijones)

Recent years have not exactly been kind to Luís Bárcenas Gutiérrez. For decades he served as treasurer of the governing People’s Party, a position which afforded him de facto control over the party’s accounts and money movements. In 2009, however, a money laundering investigation by Swiss authorities discovered more than €30 million spread across an assortment of Swiss bank accounts, all under his name. It soon came to light that for almost 20 years Bárcenas had “allegedly” been paying under-the-table bonuses to senior figures in the Popular Party (PP), including, allegedly, the former and current prime-ministers José Maria Aznar and Mariano Rajoy. During that time large construction companies gave the party millions of euros in undeclared donations, which were promptly redirected by Bárcenas into the deep pockets of senior party members and the bank accounts of the party’s regional offices.

Although these illegal practices appear to have been common knowledge to the party leadership since 1990, Bárcenas has been made the solitary fall guy in the affair. In January 2013 he was sentenced to jail without bail. As he awaits his sentence in the rather austere surroundings of Madrid’s El Soto prison, Bárcenas’s once-fine name, now synonymous with political corruption in Spain, is once again being dragged through the press-grinder. The reason? According to Spain’s finance website El Confidencial, a taped phone conversation between two members of the Neapolitan mafia, la Camorra. It reads like a scene out of a Scorcese movie: On March 25th Ciro Rovai, the leader of the “Rovai clan,” who was arrested by Spanish police this Tuesday, was caught on tape telling a fellow Camorra member that he had been in contact with the former PP treasurer about the possibilities of “investing” in Madrid’s now-doomed Eurovegas project. “He (Barcenas) told me that the mafia and politics are one and the same”, Ravai recounted.

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Secret Path Revealed for Chinese Billions Overseas (Bloomberg)

For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets including New York, Sydney and Vancouver despite their country’s currency restrictions. Now, one way they could be doing it is clearer. Last week, when China Central Television leveled money-laundering allegations against Bank of China Ltd., the state-run broadcaster’s report prompted the revelation of a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.

Offered by some banks in the southern province of Guangdong, across the border from Hong Kong, the trial program was introduced in 2011 for overseas property purchases and emigration and doesn’t constitute money laundering, Bank of China said in a July 9 statement. The transfers were allowed by regulators and reported to them, the bank said. “What it shows is the government has been trying to internationalize the renminbi for a lot longer than we thought,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Ltd., said by phone, using the official name for China’s currency and referring to policy makers’ long-stated goal of allowing the yuan to become freely convertible with other currencies. “I’m rather encouraged by this news because this is the way they need to go.”

Read more …


What Happened To Japan’s Yen-Driven Export Boom? (CNBC)

When Japan’s Prime Minister Shinzo Abe came to power in late 2012, he hoped a weaker yen would give exporters a much-needed boost as well as spur the inflation needed to revive the world’s third biggest economy. Eighteen months on and after an almost 30% decline in the yen’s value driven by massive monetary stimulus from the Bank of Japan, the currency has failed to lead to the export boom the government had hoped for. Japan’s annual exports declined in May for the first time in 15 months, latest data show. More disturbingly, say economists, is that the yen’s decline has failed to boost export volumes, which peaked in 2007 and fell for a third year running in 2013.

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Certain to screw up.

Fed Has Little Uncertainty, Despite Forecasting Misses (WSJ)

Federal Reserve policy makers have been consistently too optimistic about economic growth and too pessimistic about the falling unemployment rate. But ask them if they’re uncertain about their forecasts and this is their answer: no more than usual. In 2012, Fed officials said they were more uncertain than usual about their forecasts for growth, unemployment and inflation. But over the course of 2013 their uncertainty has declined, and now almost all Fed officials are confident in their forecasts, according to the Fed’s self-assessment of uncertainty which was released Wednesday as part of Fed’s June meeting minutes. Fed officials have recently been concerned that markets have grown too complacent. Yet even at the Fed, only three officials rank their uncertainty about growth as high, and only two are more certain than usual about their unemployment forecasts. (The minutes do not identify by name which Fed official makes which forecast.)

For the record, most Fed officials see growth of 2.1% to 2.3% this year and unemployment at the end of 2014 between 6% and 6.1%. Those forecasts were made in advance of their June 17-18 policy meeting, and already they’re beginning to look a little suspect. The economy contracted at an annualized rate of 2.9% in the first quarter of 2014, according to a Commerce Department report released the week after the Fed meeting. That’s going to make 2.3% growth over all of 2014 a difficult target to reach. (As we noted earlier, downward growth revisions at the Fed have been inexorable.) And the unemployment rate dropped to 6.1% in June from 6.3% in May according to the Labor Department‘s July 3 report. Another month or two with an unemployment rate decline and the Fed will have blown its unemployment forecast as well.

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Huh? I thought they make the curve?!

Are The Fed And The ECB Falling Behind The Curve? (CNBC)

If you believe some of the U.S. Federal Reserve (Fed) governors’ forecasts, the answer for the Fed’s case is a resounding “yes.”Speaking at the Sixth Annual Rocky Mountain Economic Summit in Jackson Hole, Wyoming, last Friday these Fed officers confidently predicted that the U.S. economy would be growing at a rate of more than 3% over (an unspecified number of) next quarters. At the same time, they announced that an increase in interest rates was likely to begin in late 2015 or sometime in 2016. Here is why these forecasts clearly imply that the Fed is already behind the curve. With an estimate of U.S. economic growth potential somewhere in the range of 2 to 2.25%, an actual growth rate of more than 3%, sustained over several quarters, would create labor and product market pressures that would lead to accelerating inflation. Obviously, if such a scenario were to pass, interest rates would begin rising much before the second half of 2015.

And, as always in similar situations, the prospect of an open-ended credit tightening would create serious problems in asset markets, without any guarantees of promptly reestablishing market stability and inflation control. That is what is meant by the monetary policy falling behind the curve. This also clarifies that the furious debate we are now witnessing about the policies conducted by the American and European monetary authorities must be based on thoughtful forecasts about the economic conditions likely to prevail over the next twelve months rather than on what we see at the moment. That is tough. And to make things even more difficult, this particular forecasting exercise has to contend with additional uncertainties, which are technically called “lags in the effect of monetary policy.” In other words, we don’t know exactly how long it takes for a change in monetary policy to affect demand, output, employment and inflation. That, too, has to be estimated.

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Update Befuzzle.

America’s Six Largest Banks Prepare To Update Investors (Guardian)

America’s biggest banks will update investors this week amid expectations that the financial services sector has been hit once more by lacklustre lending, poor trading and the soaring cost of legal expenses tied to a series of fines and investigations. The six largest US banks – Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo – are expected to show quarterly revenue declined by 5.6% from the previous year, according to the analyst estimates. Profits are expected to drop as banks face a tough comparison with a strong second quarter last year. The results come as regulators are negotiating settlements with some of the banks and continue to investigate others over a variety of issues. Citigroup, which reports on Friday, is believed to be close to a $7bn (£4.1bn) settlement over the sale of risky mortgages in the runup to the financial crisis. The justice department reached a similar agreement with JP Morgan, reporting Tuesday, last year.

The justice department is also in talks with Bank of America about alleged wrongdoing in its mortgage business ahead of the crisis. The talks with the bank, which reports on Wednesday, have apparently stalled. Reuters reported earlier this month that the attorney general, Eric Holder, had refused to meet Bank of America chief executive Brian Moynihan because the two sides remain too far apart. Alongside legal woes the banks are also experiencing continued problems on their trading desks, once the main driver of growth, now held back by new regulations aimed at tamping down excessive risk taking and lack of appetite among investors. Foreign exchange and fixed income trading revenues have fallen at the investment banks this year. Bond trading income declined by 11% at Goldman Sachs in the first quarter and investors will be watching closely for signs of improvement when the bank reports on Tuesday.

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Don’t count out Vlad.

US, EU Sanctions Aid Putin’s Master Plan (WolfStreet)

London is, according to Bloomberg, “the undisputed foreign hub for Russian business.” That’s where Russian companies hire law firms and investment bankers to handle takeovers. That’s where rich Russians like to live with their families or just hang out and have fun. That’s where they like to spend lots of money. But the sanction spiral has already – and very inadvertently – accomplished one of the big goals, not of President Barak Obama or Chancellor Angela Merkel, but of President Vladimir Putin: keep Russian money in Russia, and perhaps even bring back some of the money that has wandered astray over the years to seek greener pastures elsewhere. Capital flight, particularly from the vast underground economy, is one of Russia’s most pressing economic problems. And Putin’s angle of attack has been, well, brutal in its own way:

The spectacular collapse of the Cypriot banks last year took down much of the “black money” Russians and their mailbox companies – there were over 40,000 of these outfits in Cyprus – had on deposit there. Instead of bailing out the cesspool of corruption that these banks were, or even the nation with another emergency loan, as Russia had already done before, he just smiled and let it happen. And much of the money of his compatriots was allowed to evaporate. Perhaps he’d read Global Financial Integrity’s report – designed to advise the Russian government on these issues – that called Cyprus “a Money Laundering Machine for Russian criminals.” And so the sanction spiral against Russian oligarchs and their companies fits neatly into his overall long-term design. It includes the de-dollarization of world trade – an endeavor where he found new friends even in France, after French megabank BNP-Paribas agreed to pay a $8.9 billion penalty to the US Government.

China has been working furiously to elevate its own currency to a world-trade currency to rival the dollar and the euro, though it still has a long ways to go. Putin has been eager to switch the oil and gas trade with China away from the dollar, and progress is being made on a daily basis. And it includes getting Russian companies and rich individuals, by hook or crook, to leave at least some of their money in Russia and perhaps even repatriate some of the money now invested elsewhere so that it can do its magic for the economic development of Russia, and propel the country forward. Once in Russia, the money would presumably remain more accessible to the Russian government, which these very oligarchs have seen is not a great situation to be in, if they end up on the wrong site of Putin. Russia’s legal system can be a hazard to their health and wealth, and banks can be iffy. Hence the prevailing wisdom to send overseas every ruble, dollar, or euro that isn’t totally nailed down.

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An ancient Buddhist conundrum: if there is no recovery, how can it falter?

Eurozone Recovery Falters As Industrial Production Shrinks 1.1% (CAM)

Further evidence that the fragile Eurozone recovery could be beginning to splutter emerged today. Industrial production in the 18-member euro area fell sharply by 1.1% in May, the largest monthly drop since September 2012, according to figures released by the EU’s statistics agency Eurostat this morning. The data confirmed analyst fears that a significant shrink in industrial output had been coming, especially as the economic powerhouses of Germany, France and Italy had already reported some surprisingly large contractions in May. Economists had actually predicted a slightly bigger dip of 1.2%. May’s figures were up 0.5% from the same month last year. EU industrial production has been volatile in 2014 and analysts acknowledge that these figures can be erratic from month to month. April numbers had shown a 0.7% increase, rebounding from a 0.4 dip in March. However the marked fall in industrial output is stoking fears that the Eurozone recovery is stalling before it has even begun to really gain steam.

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Oh, bugger!

Draghi Faces Age-Old Problem in Trying to Spur Europe Inflation (Bloomberg)

Mario Draghi faces an age-old problem as he tries to revive euro-area inflation. A rapid rise in the importance of older workers in the currency bloc’s labor market over the next five years is set to prove a drag on inflation already about a quarter of the European Central Bank’s target of just below 2%, according to Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. Since 2008 the number of workers aged between 50 and 64 has gained in the main euro-area nations and now account for 26% to 31% of total employment, up from 20% to 25% previously. Employees aged more than 65 have also increased, yet the amount still lags the U.S. and U.K., suggesting to Alexandrovich that the “euro-area economics may only be at the start of what is a long-term structural shift toward increased importance of older workers.”

If so, then ECB President Draghi has another structural factor to worry about as he tries to prevent deflation with easy monetary policy. That’s because older workers tend to defer consumption and save for the future, while youngsters entering the labor market are more likely to consume today. While data are hard to find for the euro area, an Institute for Fiscal Studies analysis of the U.K. suggests that from 2000 and 2005, British workers aged 55 to 59 had an average annual saving rate of about 5.5%, while those less than 34 ran up no savings. “So a recovery where jobs are going predominantly to older workers, which is what is happening today, will look very different than that where younger workers are getting jobs for the first time,” said Alexandrovich in a report to clients. “All things being equal, it would imply weaker consumption and a softer profile for inflation.” The higher propensity to save also implies downward pressure on interest rates, which Draghi cut to record lows last month to encourage economic growth, Alexandrovich said.

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The US saved GM with many billions; can’t let it collapse now.

Prosecutors’ Case Against GM Focuses On Misleading Statements (Reuters)

Federal prosecutors are developing a criminal fraud case hinged on whether General Motors made misleading statements about a deadly ignition switch flaw, and are examining activity dating back a decade, before GM’s 2009 bankruptcy, according to multiple sources familiar with the investigation. At the same time, at least a dozen states are investigating the automaker. Two state officials said that effort is likely to focus on whether GM broke consumer protection laws. Both federal and state investigations into the switch, which is linked to at least 13 deaths and 54 crashes, are at early stages, and it is possible that cases may not be brought. Sources said federal criminal prosecutors are working on a set of mail and wire fraud charges, similar to the criminal case Toyota Motor Corp settled earlier this year over misleading statements it made to American consumers and regulators about two different problems that caused cars to accelerate even as drivers tried to slow down.

Delphi Automotive, the maker of the GM switch, is not a target of criminal charges, the people said, because it did not make substantial public statements about the safety of the vehicles or the part. That would make it difficult to build a case under the main federal fraud laws, the wire and mail fraud statutes. Greg Martin, a spokesman for GM, said his company continued to work with investigators, declining to comment further, and a spokeswoman for Delphi said the company had been told it was not a target of investigations and was working cooperatively with all government officials. A spokesman for Manhattan U.S. Attorney Preet Bharara, who is leading the criminal probe, declined to comment. Prosecutors are not limiting their inquiries to events that occurred after GM emerged from bankruptcy in 2009, sources said. Legal experts said bankruptcy does not release GM from criminal liability in a fraud case.

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It’s strange how strong the pressure is to deny even this most obvious fact.

Study of Organic Crops Finds Fewer Pesticides, More Antioxidants (NY Times)

Adding fuel to the debates over the merits of organic food, a comprehensive review of earlier studies found substantially higher levels of antioxidants and lower levels of pesticides in organic fruits, vegetables and grains compared with conventionally grown produce. “It shows very clearly how you grow your food has an impact,” said Carlo Leifert, a professor of ecological agriculture at Newcastle University in England, who led the research. “If you buy organic fruits and vegetables, you can be sure you have, on average, a higher amount of antioxidants at the same calorie level.” However, the full findings, to be published next week in the British Journal of Nutrition, stop short of claiming that eating organic produce will lead to better health. “We are not making health claims based on this study, because we can’t,” Dr. Leifert said.

The study, he said, is insufficient “to say organic food is definitely healthier for you, and it doesn’t tell you anything about how much of a health impact switching to organic food could have.” Still, the authors note that other studies have suggested some of the antioxidants have been linked to a lower risk of cancer and other diseases. The conclusions in the new report run counter to those of a similar analysis published two years ago by Stanford scientists, who found few differences in the nutritional content of organic and conventionally grown foods. Those scientists said the small differences that did exist were unlikely to influence the health of the people who chose to buy organic foods, which are usually more expensive. The Stanford study, like the new study, did find pesticide residues were several times higher on conventionally grown fruits and vegetables, but played down the significance, because even the higher levels were largely below safety limits.

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Jun 302014
 June 30, 2014  Posted by at 3:04 pm Finance Tagged with: , , ,  3 Responses »

DPC Fisher schooners at ‘T’ wharf, Boston 1904

A principle commonly known as Gresham’s law, though it can be dated as far back as Biblical times, not just the 16th century its namesake lived in, states that bad money drives out good money. It was used to address what happens when bits of metal are ‘shaved’ off coins, or alloys with cheaper metal are introduced, or counterfeits: people tend to keep what is perceived as ‘good’, more valuable, and spend what is seen as ‘bad’, and cheaper.

The obvious ‘trick’ for both issuers of money and anyone handling it is to make the bad sufficiently indistinguishable from the good, so people don’t notice they’re being duped. The end of the gold standard, in its various phases throughout various parts of the world, was a solid step in that direction, as was the introduction of fiat money. Essentially, there was (is) no good money anymore; it no longer represents a physical value, just a belief. So much for Gresham’s law ..

Of course there are still precious metals and other valuable materials, but if fiat money comes in unlimited quantities, it can and will all be bought, just like politicians. So you might say there’s still a bit of Gresham left after all. You might also say that not only gold and politicians are bought with fiat money, so is everybody who works a job and gets paid with it.

Seen in this light, and in the relentless logic of it, it’s a miracle that the ‘sociopath’ who brought back Gresham’s law in its full splendor didn’t arrive much earlier. That sociopath is debt, in the words of Andy McNally, chairman of Berenberg Bank UK. Not that governments and the world of finance never used debt, or let it accumulate, but if you look at the hockeystick graphs that describe all kinds of debt everywhere today, there’s no denying that in its present form it’s a rather recent phenomenon.

Debt today breeds inequality, since some people have access to it at very low interest rates, while others do not. Even if you pay ‘only’ 5% on your mortgage, your bank pays just 0.5%. And that’s merely the beginning. The value of the products of your labor are being distorted, manipulated and eaten alive whole by what others, from behind their luxurious desks, borrow at the flick of a switch and the stroke of trading keyboard. What then is your labor worth? Not much. And its value is necessarily declining.

If money is what you get paid for the work you do, then debt is not money. Or should not be. But the two are sufficiently indistinguishable that you can’t tell the difference. So someone who wants the fruits of your labor can pay you with debt, with something he himself never lifted a finger for. If debt were money, that would not be possible. Nor would it if you could tell the two apart.

The difference between debt and equity is the same as that between debt and money. And McNally wrote a great piece on how debt drives out equity in our world, and reaffirms Gresham’s law.

How Debt The Sociopath Used Its Seductive Charms To Kill Innocent Equity, Provider Of Social Justice

It’s nearly 60 years since Imperial Tobacco’s pension fund manager, George Ross-Goobey, gave his landmark speech with a simple message – company shares represent something that grows, so stand a better chance of rewarding pensioners with a comfortable retirement. Not just that, but he also pointed out that the interest on the shares was higher than on the gilt-edged bonds that his colleagues all “knew” were safe. [..] The back end of 2012 was an equally historic moment for UK pensioners. For the first time in more than half a century, their retirement funds once again held more bonds than equities.

These two events are like front and back cover to one of the greatest murder stories of our age. Equity, in the very broadest sense, has been killed. [..] The culprit was obvious from the start – it was the debt that done it. The word “equity” comes from “aequitas”, the Latin concept of justice, equality, fairness and conformity. It should be no surprise, therefore, that the privation of equity finance in society is leading to an extreme concentration of wealth and a general sense of injustice, unfairness and a feeling that some are not quite playing by the rules.

After a long history of capitalism’s broadening ownership through 19th century land reform and 20th century home-ownership, its finest trait has been thwarted by the greatest sociopath of all time. Our productive assets are debt-financed like never before and, although it flatlined after the Second World War, inequality’s sudden upsurge after 1971 tallies curiously well with credit creation. The numbers are staggering. The UK’s banks’ assets have gone from 70% of national income in 1970 to more than 450% today.

Debt’s cohorts often pointed to this “financial deepening” as a clear sign that finance was being democratised. But once debt outgrew its natural purpose – a mortgage perhaps – the death of equity was a certain outcome. [..] Since 1987, the debt of UK companies has gone from 45% to more than 90% of GDP. For the six years running up to the crisis, the UK equity market actually used to get money out of companies, rather than putting it in. Like all good sociopaths, debt befriended the most unsuspecting accomplices. Tax, governments, accountants, actuaries, regulators, banks and even cultural values all fell under the spell of debt, keeping productive equity out of the hands of the many.

[..] Gordon Brown’s canning of the dividend tax credit was the final nail in equity’s coffin. One actuary calculates the impact on UK pension funds at more than £100bn but, more importantly, it has left equities less attractive for investors and debt finance more attractive for companies. The banks were soon incentivised to advise on debt before equity. Companies with secure balance sheets make for bad investment banking clients – much better to lend to them at 5% and fund that debt at 0.5% than find them some equity finance and send them on their way.

Governments and regulators around the world bought into the “safety” that debt claimed to offer. When debt stopped returning their call, politicians of all shades soon cried for credit to flow again. Regulators set the tone for financial advisers – equity is risky, debt is safe. Eventually debt mesmerised the greatest accomplice of all – our cultural values. [..] Debt financed impatience and gave us permission to live beyond our means. It destroyed our sense of partnership and reduced relationships to mathematics rather than shared endeavour.

When the inquest into the death of equity is held, and the economists, central bankers, politicians and regulators have given their evidence, the jury will endure an expert witness on the basic difference between debt and equity. They are not merely different forms of finance, as debt would have us believe. They embody different incentives and rewards that define how we operate as a society.

The financial rewards of economic progress are always returned through the equity, not the debt, which is why only the few who defied debt’s charm now get most of the rewards. The jury will see how debt duped us all and deprived us of one of the most powerful forces in society. We should have financed our productive assets with as much equity as possible, whenever possible. Equity aligned owners of assets with their custodians: it was fair and impartial. It was even-handed. It was effective. It was the purest form of finance.

Just like 99% of our ‘money supply’ is made up of credit, 99% of all debt is bad. Not in the sense that it can’t be paid back, but that it distorts our lives, even if we don’t always understand how that works. Why can’t you pay for a house with your labor, why do you need a loan to do it? Because the others do it that way. Which drives up prices so much, you have to as well.

Central banks today are the sociopath debt’s main accomplices. They lower rates to near zero and hand out the stuff like Halloween candy. To banks, who, if they feel like it, hand it to you at a rate at least ten times higher than what they pay. It may seem to work as long as those rates are so low. But if equity markets are basically dead, then who’s going to finance the real economy? There’ll be no-one left.

Lip service.

BIS: Global Markets Euphoria Does Not Reflect Economic Reality (Finfacts)

The Bank of International Settlements (BIS) says in its annual report which was issued Sunday that the current global markets euphoria does not reflect economic reality and its general manger warned on interest rates that: ” if they persist too long, ultra-low rates could validate and entrench a highly undesirable type of equilibrium – one of high debt, low interest rates and anaemic growth.” The BIS is the bank for central banks and is the oldest international financial organisation, having been founded in Basel, Switzerland in 1930. The annual report says: “The overall impression is that the global economy is healing but remains unbalanced. Growth has picked up, but long-term prospects are not that bright. Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession.”

“Financial markets are euphoric, in the grip of an aggressive search for yield…and yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain,” said Claudio Borio, the head of the BIS’s monetary and economic department. The BIS said growth is still below its precrisis levels and while the world economy expanded 3% in the first quarter of 2014 compared with a year earlier – weaker than the 3.9% average growth rate between 1996 and 2006, in some advanced economies, output, productivity and employment remain below their precrisis peaks. “Good policy is less a question of seeking to pump up growth at all costs than of removing the obstacles that hold it back,” the bank said pointing to the recent upturn in the global economy as a precious opportunity for reform while warning that policy needed to become more symmetrical in responding to both booms and busts.

Global markets are currently “under the spell” of central banks and their unprecedented accommodative monetary policies, it said and warned that returning to normal monetary policy too slowly could also be dangerous for government finances. “Keeping interest rates unusually low for an unusually long period can lull governments into a false sense of security that delays the needed consolidation,” it said, as the glut of cash encourages cheap government borrowing.

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Andy McNally is chairman of Berenberg Bank UK.

How Debt the Sociopath Killed Innocent Equity, Social Justice (McNally)

It’s nearly 60 years since Imperial Tobacco’s pension fund manager, George Ross-Goobey, gave his landmark speech with a simple message – company shares represent something that grows, so stand a better chance of rewarding pensioners with a comfortable retirement. Not just that, but he also pointed out that the interest on the shares was higher than on the gilt-edged bonds that his colleagues all “knew” were safe. It was a hard sell, but he clearly had all the skills you need to succeed in modern finance. Imperial Tobacco’s retirees had a better old age than most, not least Ross-Goobey himself, who retired with a handsome pension and, supposedly, a limitless supply of his favourite cigar.

The back end of 2012 was an equally historic moment for UK pensioners. For the first time in more than half a century, their retirement funds once again held more bonds than equities. These two events are like front and back cover to one of the greatest murder stories of our age. Equity, in the very broadest sense, has been killed. This is no Agatha Christie novel, however. Although there are many discredited witnesses, clues, red herrings and disguises, there is no “Least Likely Suspect”. The culprit was obvious from the start – it was the debt that done it.

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Hong Kong’s China Debt Trap (MarketWatch)

All eyes this week will be on Hong Kong’s protest march for democratic reform, with numbers expected to be swollen by Beijing’s recent hardening stance towards the territory. But how soon will Hong Kong have another gripe to take up with its sovereign as more alarms sound over a massive lending boom to mainland China? This potential debt trap is increasingly on the radar of investors after a succession of cautionary comments from analysts and regulators about mainland-bound loans from Hong Kong-based banks. The latest came from Moody’s last week, as they reiterated an earlier warning about the risks in the rapid expansion of Hong Kong banks’ lending to mainland Chinese entities.

The exposure of Hong Kong to the mainland grew by 29% in 2013 to 2.3 trillion Hong Kong dollars ($297 billion), accounting for 20% of total banking assets, Moody’s said. This, they said, poses credit challenges as it increases banks’ exposures to China’s economic and financial vulnerabilities, as well as pressuring some of the banks’ liquidity profiles and capitalization levels. Both the IMF and the Hong Kong Monetary Authority have also recently flagged similar concerns about the wall of money Hong Kong was sending into a slowing and fragile-looking Chinese economy. Earlier this year, brokerage Jefferies described a “parabolic” rise in lending to mainland China, which it saw as a looming problem for Hong Kong. From almost zero in 2009, this lending has reached 150% of Hong Kong’s GDP.

This surge illustrates that we are talking about a relatively new phenomenon which has coincided with massive quantitative easing by the world’s top central banks, along with a series of measures by China to internationalize its currency. This also means that assessing the level of risk when these two very different financial systems come together puts us in somewhat unchartered territory. What we do know is Hong Kong’s lending is by far the largest. Earlier this month, Fitch Ratings calculated that Hong Kong’s exposure to the mainland had reached $798 billion. This compared to a total of $400 billion for banks elsewhere in the Asia-Pacific region – mainly Australia, Japan, Macau, Taiwan and Singapore.

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China Debt Set for Biggest Quarterly Gain in Two Years on Easing (Bloomberg)

Chinese sovereign bonds headed for their biggest quarterly increase in two years after the central bank eased monetary policy to spur economic growth. The government notes rose 2.4% since March, the most since the second quarter of 2012, a Bloomberg index shows. The yield on benchmark 10-year securities fell 45 basis points to 4.05% this quarter through June 27, according to ChinaBond data. The yield on the 4.42% debt due March 2024 was steady today at 4.07% as of 10:48 a.m. in Shanghai, National Interbank Funding Center figures show. Premier Li Keqiang said this month authorities would ensure growth of at least 7.5% in 2014 after year-on-year expansion dipped to 7.4% in the first quarter from 7.7% in the preceding three months. The People’s Bank of China has cut some lenders’ reserve requirements twice this quarter and the State Council has announced a ‘mini-stimulus’ program including tax relief for small companies and increased spending on railways.

“The PBOC’s policy direction is to guide interest rates lower to ensure growth,” said Zhang Guoyu, a Shanghai-based analyst at Orient Futures Co. “If it continues to want lower financing costs to benefit the real economy, the 10-year yield may have further downside.” The official Purchasing Manufacturing Index (CPMINDX) may have climbed to 51 in June, the highest level this year, according to a Bloomberg News survey ahead of the statistics bureau’s data release tomorrow. Targeted cuts in reserve requirements have helped companies’ profitability, although the foundation for recovery isn’t solid, Caixin magazine reported on its website yesterday, citing Zhang Jianhua, head of the PBOC’s Hangzhou branch.

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Slowing China Economy Dims Profit Outlook to 2012 Low (Bloomberg)

The most-actively traded Chinese companies in the U.S. are on pace to report the smallest profits in two years as growth in the world’s second-largest economy decelerates to the slowest since 1990. Analysts covering stocks listed on the Bloomberg China-US Equity Index estimate that on average they will post earnings of $5.64 per share this year, which would be the lowest profits reported since 2012, data compiled by Bloomberg show. They’ve cut revenue forecasts by 7.9% in the past 11 weeks. Earnings and sales projections are falling as economists surveyed by Bloomberg estimate China’s gross domestic product expansion will slow to 7.4% this year, the weakest pace in 24 years, after back-to-back annual increases of 7.7%.

While the government has implemented tax breaks, accelerated spending and cut some banks’ reserve requirements, investors are concerned that officials aren’t doing enough to stem a decline in real estate prices and boost private consumption. “What we’re seeing now is the near-term impact of the adjustment in expectations as these policies get implemented,” Alan Gayle, senior investment strategist, who helps oversee about $50 billion for RidgeWorth Investments, said by phone from Atlanta on June 27. “They’re trying to slow down some of the more inflationary real-estate related sectors and improve overall average standards of living.”

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Is China Manufacturing Data Due For A Dip? (CNBC)

Chinese manufacturing data could disappoint this week amid weakness in the economy and that may just be the beginning, analysts told CNBC. A rebound in export orders in recent months boosted China’s manufacturing sector amid a weaker yuan and signs of a recovery in the U.S., one of China’s major trading partners. But some analysts told CNBC they are worried that the underlying risks to China’s economy would spill over to the country’s manufacturing sector, derailing the recent positive trend. “I’m going to take the under,” said Joe Magyer, senior analyst at The Motley Fool, referring to expectations for official purchasing managers’ index (PMI) data out on Tuesday, which he expects to start to reflect weakness in China’s economy. The final reading for HSBC’s PMI data is also due Tuesday.

Last week a flash reading for the HSBC manufacturing data hit a seven-month high of 50.8, up from 49.4 in May, marking the first time the figure crossed the 50 level – the dividing line between expansion and contraction – this year. Meanwhile, official PMI rose to a five-month high of 50.8 in May. But Magyer warned the positive run could end soon. “I know a lot of people think the mini stimulus that’s been going on is going to help but China has been fueled by such an expansion in credit over the past few years any incremental stimulus isn’t going to have much of an effect,” he said, referring to recent targeted reserve requirement ratio (RRR) cuts for banks in weaker sectors of the economy, such as agriculture.

Magyer flagged China’s real estate market as another major risk, amid signs of cooling. Revenue from property sales for the January-to-May period dropped 8.5% on year, while data from Chinese real estate website Soufun show May land sales fell 45% on year and transaction value fell 38%. “When you look at some of the key drivers of China right now one of them is real estate,” said Magyer. “Pricing for real estate in China has finally stalled… and that’s important because 20% of the economy is related to real estate and when you look at all the iron ore that’s piling up in ports I think you have a pretty good reason for that. [The reason] could be [that] one of the major components of the economy is cooling off,” he added.

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Argentina at Brink of Default as $539 Million Payment Due (Bloomberg)

Argentina is poised to miss a bond payment today, putting the country on the brink of its second default in 13 years, after a U.S. court blocked the cash from being distributed until the government settles with creditors from the previous debt debacle. The nation has a 30-day grace period after missing the $539 million debt payment to seek an accord with a group of defaulted bondholders led by billionaire Paul Singer’s NML Capital and prevent a default on its $28.7 billion of performing global dollar bonds. Both Argentina and NML have said that they’re open to talks. A decade-long battle between Argentina and holdout creditors from the country’s $95 billion default in 2001 is coming to a head. The U.S. Supreme Court on June 16 left intact a ruling requiring the country pay about $1.5 billion to holders of defaulted debt at the same time it makes payments on restructured bonds.

Argentina last week transferred funds to its bond trustee to pay the restructured notes, only to have U.S. District Court Judge Thomas Griesa order the payment sent back while the parties negotiate. The judge’s decision “closes Argentina’s options to finally force it to negotiate,” said Jorge Mariscal, the chief investment officer for emerging markets at UBS Wealth Management, which oversees $1 trillion. “Argentina should now stop using these delay tactics and get serious.” Argentina took out a full-page advertisement in yesterday’s New York Times saying that Griesa favored the holdout creditors and was trying to push Argentina into default. The ruling “is merely a sophisticated way of of trying to bring us down to our knees before global usurers,” Argentina said. “But he will not achieve his goal for quite a simple reason: The Argentine Republic will meet its obligations, pay off its debts and honor its commitments.”

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Emerging-Market Companies Vulnerable on $2 Trillion Debt Binge (Bloomberg)

Emerging-market companies that took on more than $2 trillion of foreign borrowing since 2008 are vulnerable to an evaporation of funding at the first sign of trouble, according to the Bank for International Settlements. Bond investors willing to lend generously when conditions are good can pull out in a crisis or when central banks tighten monetary policy, analysts led by Claudio Borio, head of the monetary and economic department, wrote in the BIS annual report. Emerging-market companies that lose access to external debt markets may then be forced to withdraw bank deposits, depriving domestic lenders of funding as well, they said.

Low interest rates and central bank stimulus in developed nations, combined with a retreat in global bank lending, have encouraged emerging-market borrowers to raise debt abroad, according to the Basel, Switzerland-based BIS, which hosts the Basel Committee on Banking Supervision that sets global capital standards. Demand for higher-yielding securities also helped suppress borrowing costs for riskier issuers. “Like an elephant in a paddling pool, the huge size disparity between global investor portfolios and recipient markets can amplify distortions,” the analysts wrote. “It is far from reassuring that these flows have swelled on the back of an aggressive search for yield: strongly pro-cyclical, they surge and reverse as conditions and sentiment change.” Loose financing conditions “feed into the real economy, leading to excessive leverage in some sectors and overinvestment in the industries particularly in vogue, such as real estate,” according to the report.

“If a shock hits the economy, overextended households or firms often find themselves unable to service their debt.” Emerging-market companies sell bonds mainly through foreign units, exposing them to currency risk, the BIS said. The true size of their borrowing could also be masked as foreign direct investment, making it a “hidden vulnerability,” according to the report. With emerging markets becoming more important to the global economy and financial system, any stress affecting them will probably hurt developed nations, too, it said. “The ramifications would be particularly serious if China, home to an outsize financial boom, were to falter,” the analysts wrote. That would hurt commodity exporters that have seen strong credit and asset price increases drive up debt and property prices, as well as other nations still recovering from the financial crisis, the BIS said.

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If you can make people believe in perpetual growth, perpetual motion should be an easy one.

The Delusion of Perpetual Motion (Hussman)

The central thesis among investors at present is that they are “forced” to hold stocks, given the alternative of zero short-term interest rates and long-term interest rates well below the level of recent decades (though yields were regularly at or below current levels prior to the 1960s, which didn’t stop equities from being regularly priced to achieve long-term returns well above 10% annually). The corollary is that investors seem to believe that as long as interest rates are held near zero, stocks will continue to advance at a positive or even average or above-average rate. It’s certainly true that from a psychological standpoint, the Federal Reserve has induced the same sort of yield-seeking speculation that drove investors into mortgage securities (in hopes of a “pickup” over depressed Treasury-bill yields), fueled the housing bubble, and resulted in the deepest economic and financial collapse since the Great Depression.

This yield-seeking has clearly been a factor in encouraging investors to forget everything they ever learned from finance, history, or even two successive 50% market plunges in little more than a decade. But the finance of all of this – the relationship between prices, valuations and subsequent investment returns – hasn’t been altered at all. As the price investors pay for a given stream of future cash flows increases, the long-term rate of return that they will achieve on their investment declines. Zero short-term interest rates may “justify” the purchase of stocks at higher valuations so that stocks promise equally dismal future returns. But once stocks reach that point, investors should understand that those dismal future returns will still arrive.

Let me say that again. The Federal Reserve’s promise to hold safe interest rates at zero for a very long period of time has not created a perpetual motion machine for stocks. No – it has simply created an environment where investors have felt forced to speculate, to the point where stocks are now also priced to deliver zero total returns for a very long period of time. Put simply, we are already here. Based on valuation measures most reliably associated with actual subsequent market returns, we presently estimate negative total returns for the S&P 500 on every horizon of 7 years and less, with 10-year nominal total returns averaging just 1.9% annually. I should note that in real-time, the same valuation approach allowed us to identify the 2000 and 2007 extremes, provided latitude for us to shift to a constructive stance near the start of the intervening bull market in 2003, and indicated the shift to undervaluation in late-2008 and 2009.

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Good history lesson.

The Mythical Banking Crisis and the Failure of the New Deal (Stockman)

The Great Depression thus did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression – absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence – the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens – Keynesian economics and monetary central planning.

Together, these two doctrines eroded and eventually destroyed the great policy barrier – that is, the old-time religion of balanced budgets – that had kept America a relatively peaceful Republic until 1914. To be sure, under Mellon’s tutelage, Harding, Coolidge and Hoover strove mightily, and on paper successfully, to restore the pre-1914 status quo ante on the fiscal front. But it was a pyrrhic victory – since Mellon’s surpluses rested on an artificially booming, bubbling economy that was destined to hit the wall. Worse still, Hoover’s bitter-end fidelity to fiscal orthodoxy, as embodied in his infamous balanced budget of June 1932, got blamed for prolonging the depression. Yet, as I have demonstrated in the chapter of my book called “New Deal Myths of Recovery”, the Great Depression was already over by early summer 1932.

At that point, powerful natural forces of capitalist regeneration had come to the fore. Thus, during the six month leading up to the November 1932 election, freight loadings rose by 20%, industrial production by 21%, construction contract awards gained 30%, unemployment dropped by nearly one million, wholesale prices rebounded by 20% and the battered stock market was up by 40%. So Hoover’s fiscal policies were blackened not by the facts of the day, but by the subsequent ukase of the Keynesian professoriat. Indeed, the “Hoover recovery” would be celebrated in the history books even today if it had not been interrupted in the winter of 1932-1933 by a faux “banking crisis” which was entirely the doing of President-elect Roosevelt and the loose-talking economic statist at the core of his transition team, especially Columbia professors Moley and Tugwell.

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Climate Change Goes Underwater (Bloomberg)

When it comes to climate change, almost all the attention is on the air. What’s happening to the water, however, is just as worrying — although for the moment it may be slightly more manageable. Here’s the problem in a seashell: As the oceans absorb about a quarter of the carbon dioxide released by fossil-fuel burning, the pH level in the underwater world is falling, creating the marine version of climate change. Ocean acidification is rising at its fastest pace in 300 million years, according to scientists. The most obvious effects have been on oysters, clams, coral and other sea-dwelling creatures with hard parts, because more acidic water contains less of the calcium carbonate essential for shell- and skeleton-building. But there are also implications for the land-based creatures known as humans.

It’s not just the Pacific oyster farmers who are finding high pH levels make it hard for larvae to form, or the clam fishermen in Maine who discover that the clams on the bottom of their buckets can be crushed by the weight of a full load, or even the 123.3 million Americans who live near or on the coasts. Oceans cover more than two-thirds of the earth, and changes to the marine ecosystem will have profound effects on the planet. Stopping acidification, like stopping climate change, requires first and foremost a worldwide reduction in greenhouse-gas emissions. That’s the bad news. Coming to an international agreement about the best way to do that is hard.

Unlike with climate change, however, local action can make a real difference against acidification. This is because in many coastal regions where shellfish and coral reefs are at risk, an already bad situation is being made worse by localized air and water pollution, such as acid rain from coal-burning; effluent from big farms, pulp mills and sewage systems; and storm runoff from urban pavement. This means that existing anti-pollution laws can address some of the problem. States have the authority under the U.S. Clean Water Act, for instance, to set standards for water quality, and they can use that authority to strengthen local limits on the kinds of pollution that most contribute to acidification hot spots. Coastal states and cities can also maximize the amount of land covered in vegetation (rather than asphalt or concrete), so that when it rains the water filters through soil and doesn’t easily wash urban pollution into the sea. States can also qualify for federal funding for acidification research in their estuaries.

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Better start packing, guys.

Scotland Has Billions of Barrels of Shale Deposits Under Its Cities (Bloomberg)

Scotland may have billions of barrels of shale oil and gas buried under the country’s most densely populated areas, geologists said today. Scotland’s central belt, running between Glasgow and Edinburgh, may have 80.3 trillion cubic feet of gas in place and 6 billion barrels of oil, a report by the British Geological Survey said. While it’s not an estimate of how much can be extracted, if only a fraction of that amount was drilled it could transform prospects for Scottish oil and gas output.

The oil and gas industry is central to the debate on Scotland’s independence before a referendum in September. The yes campaign says existing fields in the North Sea will underpin the economy of an independent Scotland, while supporters of a no vote say declining production from offshore reserves leaves the country vulnerable. The U.K. government is offering tax breaks to shale drillers to spur development of the resource as North Sea reserves dwindle The Bowland basin in northern England may supply local natural gas demand for half a century at extraction rates of 10% similar to U.S. fields, according to a report last year.

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May 062014
 May 6, 2014  Posted by at 3:08 pm Finance Tagged with: , ,  6 Responses »

Russell Lee 3-room shack of hired man for tenant farmer and family of 10, Dickens, Iowa 1936

Hurray! Americans have found a new source of spending money; after ATM-draining their home equity till even the roofs were underwater, and maxing out every single little shred of plastic they could lay their hands on, “families looked around for what was left”, and now it’s time to empty out 401(k)’s until there’s really nothing left at all anymore. Then it’ll be recovery or die, presumably. But a recovery is not going to happen, and certainly not for society’s bottom rung. Oh well, maybe there’s some form of slavery they can enter into. Not surprisingly, the US government is quite content with this new development:

Early Tap of 401(k) Replaces Homes as American Piggy Bank

“They get hit with the penalty at exactly the time when they’re the most vulnerable,” said Reid Cramer, director of the Asset Building Program at the NAF, which tries to improve savings for lower-income families. “So it’s a real double-whammy.” For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option.

The IRS collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to. [..] Adjusted for inflation, the government collects 37% more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38% from the 2007 peak, according to Federal Reserve data.

“They didn’t have access to the home equity that they had in the past”, Cramer said. “And families looked around for what was left and they actually drained the value from the 401(k).” In 2011, 5.7 million tax returns, or about 4% of all U.S. households, reported paying penalties on early withdrawals. The government collected more than enough money from these penalties to fund the National Oceanic and Atmospheric Administration.

But wait, there’s hope. Eternal hope. Karen Weise for BusinessWeek reports in a piece filled with joyful glee that Americans who still have a home are less underwater than they used to be:

America’s Underwater Homeowners Are Afloat Once Again

At the bottom of the housing crash, more than a third of all homeowners owed more than their houses were worth. They were plunged underwater by a combination of collective overborrowing during the housing bubble and plummeting prices during the crash. Bit by bit over the years, homeowners have been climbing out of that hole, and new data from Black Knight Financial Services show that borrowers are approaching a threshold that will see only one in 10 U.S. borrowers underwater on home loans.

But not so fast, I beg of thee. Let’s see what’s brought about this happy news. Karen does know something:

Foreclosures wiped away the mortgages of many of the most indebted. In January 2010, 10% of borrowers owed at least 50% more than their homes were worth. By January 2014, that number fell to 2% of borrowers.

Hmm. That puts a bit of a dent in the joy, doesn’t it? The last number I’ve seen for total foreclosures in the US since the wrecking ball came down is about 7 million. If we may assume the majority of those were the deepest underwater loans out there, it’s no wonder that A) there are fewer “owners” underwater, and B) the average amount owed has gone down. On top of that, there’s something else that murks the numbers:

Cash buyers have flooded the markets, making up more than a quarter of all home sales in March. That means homes that were once financed with debt are now paid for entirely with equity.

By now I don’t feel all that joyful anymore, but Karen has less scruples. She came to write a happy piece, and she’ll stick with that idea. For the rest of us, what this comes down to is that the tens of thousands of all-cash purchases by the likes of America’s biggest homeowner, private equity fund Blackstone, have not only lifted prices, they also make numbers of average debt owed look much better. Just don’t tell the better-looking “owners” that Blackstone cut its purchases by 90% recently, and other all-cash buyers will follow suit, if they haven’t already. A simple matter of supply and demand, investment and return.

Average debt owed went down because the “worst offenders” of the subprime craze were foreclosed on, home prices rose somewhat because institutional investors stepped in to scoop up foreclosed properties, banks sit on huge numbers of homes they don’t want to finalize the foreclosure process on lest they have to transfer the losses to their books, and mortgage rates are only now coming up from a very low bottom. All factors that distort the picture.

The proof in the pudding: If these factors did not strongly influence the numbers we’re seeing, one number would be very different: the amount of home-equity loans. If things were really that much better now, banks would be more than happy to let people borrow more, not less, against their homes. They’re not. And that’s as good a sign of what is real and what’s not as we should need.

So count on a huge wave of Americans draining their 401(k)’s and other pension provisions, because many don’t have anywhere else to turn anymore. And don’t forget that much more even than home-equity loans, early 401(k) withdrawals are signs of desperation. They’re not used to buy granite kitchen tops or trips around the world or flashy foreign cars. Your typical early 401(k) withdrawal is about survival. About people who look around for what is left, and find nothing else.

Early Tap of 401(k) Replaces Homes as American Piggy Bank (Bloomberg)

Premature withdrawals from retirement accounts have become America’s new piggy bank, cracked open in record amounts during lean times by people like Cindy Cromie, who needed the money to rent a U-Haul and start a new life. Her employer, the University of Pittsburgh Medical Center, had outsourced Cromie’s medical transcription work. Cromie said the move cut her income by as much as 60%, at times leaving her with minimum-wage pay. So, last year, at age 56, she moved about 90 miles from her home in Edinboro, Pennsylvania, into her mother’s basement. To make ends meet as she moved and then quit the job, Cromie pulled out $2,767 from her retirement savings. “We made two trips and it just got to be real expensive,” she said. “That money, it was a security that I needed.”

Still unemployed, Cromie is trying to avoid tapping what’s left of her retirement savings – $7,000 that would be subject to taxes and a 10% extra penalty if she touches it in the next two to three years, before she turns 59 1/2. It’s a small number that’s part of a much larger picture: The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to. The median size of a 401(k) is $24,400 as of March 31, with people older than 55 having $65,300, according to Fidelity Investments. Those funds can disappear quickly in retirement, and the early withdrawals indicate that the coming retirement crisis could be even more acute than expected.

“They get hit with the penalty at exactly the time when they’re the most vulnerable,” said Reid Cramer, director of the Asset Building Program at the New America Foundation, which tries to improve savings for lower-income families. “So it’s a real double-whammy.” For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option. Taking money from a 401(k) – and worrying about the consequences later – became a more attractive alternative and a record number of Americans made early withdrawals in 2010.

Adjusted for inflation, the government collects 37% more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38% from the 2007 peak, according to Federal Reserve data. “They didn’t have access to the home equity that they had in the past,” Cramer said. “And families looked around for what was left and they actually drained the value from the 401(k).” In 2011, 5.7 million tax returns, or about 4% of all U.S. households, reported paying penalties on early withdrawals. The government collected more than enough money from these penalties to fund the National Oceanic and Atmospheric Administration. As economic conditions deteriorate, such withdrawals spike, as they did in 1991, 2002 and 2007. The inflation-adjusted penalty collections declined 5% in 2011, the last year for which complete data is available.

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Well, it’s still one bubble in the end.

Is the Housing Market Filled With 1,000 Mini Bubbles? (Wall St. Cheat Sheet)

The housing market is experiencing a case of deja vu. While the economy is still trying to recover from the credit meltdown that took place more than five years ago, home values in more than 1,000 cities and towns are already at or near their bubble-era peaks. According to a new analysis from Zillow, home values increased 5.7% year-over-year in the first quarter to an average of $169,800. In fact, home values have climbed higher on a year-over-year basis for 21 consecutive months. This has helped erase the losses of the housing bubble for 1,080 cities and towns across the nation. Seven of the largest 35 metros in the United States have already exceeded or will exceed their bubble peak levels by March 2015. [..]

Americans appear more than willing to forget about the disastrous housing bubble of yesteryear. Gallup recently found that 56% of Americans expect average home prices in their local area to increase, its highest reading since 2007, and up from only 33% two years ago. Meanwhile, 30% of Americans believe real estate is the best long-term investment option, compared to stocks and gold at 24%. Home values are rising, but fewer people are buying. The National Association of Realtors recently announced that total existing-home sales in March posted their seventh decline in the past eight months, representing the slowest pace since July. In a separate report, the U.S. Census Bureau said purchases of new single-family homes plunged 14.5% in March from the previous month.

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I don’t like the combination of “stubbornly-high unemployment rates” and “a crucial buying opportunity”. That can only exist in manipulated markets.

Market Reversal Alert (Michael Pento)

Scenario number one: Economic growth and inflation reach the Fed’s target levels and interest rates rise sharply on the long end of the yield curve to reflect the increase in nominal GDP. This will cause a selloff in the major averages, as the 10-Year Note jumps to 5% from its current level of 2.70%. Surging interest rates—the result of inflation and the end of QE rate suppression—will provide competition for stocks for the first time in seven years and a correction of around 10-20% occurs.

Scenario number two: The economy once again fails to make a meaningful recovery, and the overvalued market crumbles under the weight of anemic revenue and earnings growth that is woefully insufficient to support the current lofty PE ratios. Without the aid of massive money printing from the Fed, or a surge in GDP growth, a significant correction north of 20% is highly probably. Keep in mind revenue and earnings growth are less than half the historical average, and need to rapidly accelerate in order to justify the current level of the market.

For stocks prices to rise from this point, the economy must grow rapidly without causing interest rates to rise. This is a virtually impossible scenario, especially since the Fed is removing its bid for Treasuries. So, it’s either the economy doesn’t improve and stocks fall—because the Fed won’t reverse course and increase QE on a dime; or the economy improves and the interest rates spike spooks the market. Either way, the market goes down in the short term. I believe a bear market will ensue from weakening economic growth combined with the attenuation of Fed asset purchases. Further proof of our structurally-anemic economy, came when the BEA released data on April 30th that showed the economy grew at an annual growth rate of just 0.1% during Q1.

Our central bank is now buying $45 billion per month of MBS and Treasuries. Down from $85 billion at the start of this year. That number will be near zero in just a few months. Real estate and stock prices have already stopped rising and economic growth has almost completely stalled since the start of 2014. The bear market in equities and stubbornly-high unemployment rates should bring the Fed back into the debt monetization business shortly after the market crashes. This significant selloff should prove to be a crucial buying opportunity in which investors need to be preparing now to take full advantage of.

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Check. Check. Check. Check. Check. Check. Check. Check.

Eight Characteristics Of Stock Market Manias (GMO)

1. This-time-is-different mentality. Throughout history, successive market manias have been rationalized with the argument that history is no longer a reliable guide to the future. Both the “new era” of the 1920s and “new paradigm” of the 1990s were marked by a “this-time-is-different” mentality.

2. Moral hazard. Speculative bubbles tend to form when market participants believe that financial risk has been underwritten by the authorities.

3. Easy money. Great speculative bubbles have generally been accompanied by periods of low interest rates.

4. Overblown growth stories. Another common feature of a bubble is the overblown growth story. We witnessed this during the Dotcom bubble, ad nauseam.

5. No valuation anchor. The most speculative markets – from the 17th century Dutch tulip mania onwards – have been marked by the absence of any valuation anchor; when there’s no income to tether the speculator’s imagination, asset prices can become unbounded.

6. Conspicuous consumption. Asset price bubbles are associated with quick fortunes, rising inequality, and luxury spending booms.

7. Ponzi finance. Manic markets are often marked by a decline in credit standards.

8. Irrational exuberance. Valuation is the truest measure of speculative mood.

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Reform. Deregulation. Abe’s got a free copy of the IMF handbook.

Abenomics Third Arrow Creates Anxiety Among Japanese Workers (CNBC)

The prospect of labor market deregulation – a key feature of the third “arrow” of Prime Minister Shinzo Abe’s economic revival program – is creating anxiety amongst workers in Japan, says Nobuaki Koga, president of the Japanese Trade Union Confederation (Rengo). “We as workers are very much concerned about how that will be implemented. We have doubts about such a direction in policy and are quite concerned,” Koga told CNBC on the sidelines of the annual meeting of the Organisation for Economic Co-operation and Development (OECD) in Paris. Rengo is the nation’s biggest umbrella body for labor unions, representing over 6 million working men and women in Japan. “What we are hearing and seeing are only measures and ideas that will give anxiety and worries to people in terms of the security of their employment. Because of that, we oppose this [labor deregulation],” he said.

Freeing up the rigid labor market is seen as central to the government’s structural reform program. However, Abe has so far made little progress with pushing ahead labor reforms due to strong domestic opposition. Relaxing stringent job protections is seen as a step necessary to make Japanese companies more competitive and to attract foreign investment. Abe last week said he remains committed to make working conditions more flexible. “Over the past year we’ve realized how difficult it has been to do so. But we cannot grow without labor reforms. We are determined to make that happen,” Abe said in in a meeting with business leaders in London last Thursday.

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Financial innovation. Redux.

Here They Go Again: Wall Street Is Offering Debt-On-Debt-On-Debt! (Stockman)

Here’s how the daisy chain of debt works— short form. LBO’s issue debt—loads of it. Leveraged buyouts are now being priced at typical top-of-the-bubble ratios of 10X cash flow (“adjusted EBITDA”). The portion of these LBO debt towers that consists of bank term loans and revolver facilities is sold to freshly minted financial conduits called CLOs (for Collateralized Loan Obligations) which are not real companies and which do not have any money! No problem. What happens is that credit hedge funds and Wall Street trading desk hit a computer key, open a new spreadsheet window, wrap it in legal boilerplate, provide this newly minted CLO with a credit line and then start bidding for available LBO paper in the junk loan market.

When they have accumulated enough offers, they slice and dice the resulting portfolio of LBO loans, and issue multiple tiers of debt– with these new slices being rated from AAA to junk against the loans listed on the spreadsheet. So we now have a spreadsheet, a part-time “portfolio manager” and hundreds of millions of the latest CLO toxic waste. For 95 weeks running, there was no want of buyers for this CLO issued paper. In its infinite wisdom, the Fed drove interest rates on CDs and high quality paper to nearly zero—–so the scramble for “yield” was on. Soon Grandpa was being forced to buy a high yield mutual fund in order to pay the light bills.

But now LBO risks are soaring due to recklessly escalating deal prices and also because the LBO kings are stepping-up their patented late cycle cash strip-mining operations in the form of “leveraged recaps” funded with new “cov lite” debt. So even yield starved retail investors have begun to turn tail and run. During the last two weeks there were actually outflows from high yield mutual funds. That leaves a big gap in the market, however. The CLO jockeys are still banging out new spreadsheets, but buyers for the sliced and diced CLO paper are suddenly getting scarcer. Still, no problem! Here’s why. Wall Street is back in the business of lending money at the Fed’s gifted rate of zero plus a modest 80 basis point spread—so that the fast money can buy CLO paper on 9 to 1 leverage. There is your triple shuffle.

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We want QE! We want your citizens’ money!

OECD Calls For ECB To Cut Rates Immediately (WSJ)

The European Central Bank should immediately cut its benchmark interest rate, and may even then have to take additional measures to end a period of too low inflation in the euro zone, the Organization for Economic Cooperation and Development said Tuesday. In its twice-yearly Economic Outlook report, the Paris-based research body once again lowered its forecast for global economic growth, since it now expects a number of large developing economies to be more sluggish than it anticipated when it last published projections in November. The OECD said the global economy is in a less perilous state than it has been in recent years, and that policy makers “can now switch from avoiding disaster to fostering a stronger and more resilient recovery.”

But it added that growth is still more likely to be weaker than forecast, and faces a number of potential impediments, ranging from the impact on developing economies of a normalization of U.S. monetary policy, to instability in China’s financial system and the relatively new danger posed by rising tensions between Russia, the U.S. and the European Union over the future of Ukraine. The research body raised its growth forecast for the euro zone, but warned there is a risk that it will slip into deflation – or a period of self-reinforcing price declines – unless the ECB acts swiftly.

In unusually direct language, the OECD said the ECB’s main refinancing rate “should be reduced to zero” from 0.25% now, while policy makers should “possibly” cut the deposit rate “to a slightly negative level.” The research body said interest rates should not be raised from those levels until the end of 2015 at the earliest. “In particular, we call on the European Central Bank to take new policy actions to move inflation more decisively toward target and to be ready for additional nonconventional stimulus if inflation were to show no clear sign of returning there,” said Rintaro Tamaki, the OECD’s acting chief economist. He noted that new, longer-term funding for banks and purchases of government and company bonds known as quantitative easing may be necessary.

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I don’t think so. it’d be great, but there’s too much resistance.

EU Eyes Financial Transaction Tax to Start in 2016 (Bloomberg)

European finance ministers are designing a financial-transaction tax on equities and derivatives that could start in 2016 for the 11 nations that have signed up to participate. French Finance Minister Michel Sapin said details could be presented by the end of this year, to take effect at the start of 2016. “A critical mass” is emerging among nations including France, Germany, Italy and Spain, he told reporters yesterday after euro-area ministers met in Brussels. Work on a transaction tax for the 11 willing countries began more than a year ago, after a European Union-wide proposal failed. So far, the participants have remained committed to the cause without finding agreement on how the tax could work.

The participants haven’t been able to agree on whether to tax all derivatives, only equity derivatives or none at all. Nations pushing for the levy are also split over who should get to collect it, a trading firm’s country of origin or the nation where trading takes place. Smaller countries have generally sought a broader tax that raises more revenue, while bigger nations have been willing to start on a smaller scale. EU Tax Commissioner Algirdas Semeta said in Vilnius yesterday that there isn’t a common approach on how to handle derivatives. Sapin said further work would pin down how the tax’s scope would take shape.

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Think it’s bad now?

China Property Value Concern Deepens (Bloomberg)

Chinese stocks trading in the U.S. snapped a four-day gain as E-House China Holdings led a drop in real-estate companies amid mounting concern that home sales in the world’s second-largest economy are slowing. The Bloomberg index of the most-traded Chinese stocks in the U.S. fell 0.5% to 99.65 yesterday, while a gauge of Shanghai property stocks was little changed today. The American depositary receipts of E-House, a real-estate agent, dropped as much as 6.1%. SouFun Holdings, which operates a real estate website, sank for the first time in three days. New Oriental Education & Technology Group tumbled the most on the ADR gauge as Deutsche Bank cut it to hold from buy.

Sales of new homes in 54 cities during the May 1 to May 3 holiday fell 47% from the same period in 2013 to the lowest level in four years, Centaline Group, parent of China’s biggest real-estate brokerage, said May 4. The report comes two weeks after the National Bureau of Statistics said the value of residential sales slumped 7.7% in the first quarter. “I am cautious toward the Chinese property market,” Elena Ogram, a Zurich-based investor at Bank Bellevue AG, who oversees $50 million in emerging-market assets including Chinese stocks, said by phone. “The government may take steps to support the market, but we are not expecting any rosy news.”

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., dropped 0.9% to $34.70. The Shanghai property stock index dropped 0.1% today, extending a four-day, 5.2% decline. E-House fell 3.3% to $8.91. SouFun retreated 2.7% to $12.25. Developers including China Vanke Co. and Greentown China Holdings Ltd. have cut prices, and discounts have spread from smaller cities with “a massive” oversupply to big cities including Shanghai and Guangzhou where demand remains strong, according to an April 28 report by China Real Estate Information Corp., a property data and consulting firm.

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Hey, just buy in London …

China’s Millennials Can’t Afford Homes in Beijing (BusinessWeek)

For many young professionals in Beijing, the dream of owning a home feels increasingly remote. Soaring home prices—driven in large part by the popularity of real estate as an investment vehicle in China—mean that even relatively successful young workers find it hard to climb onto the housing ladder in leading cities. According to a recent study by the University of International Business & Economics in Beijing, fewer than a quarter of college-educated, employed professionals in Beijing age 34 and younger are homeowners. Those with relatives in the capital city often reside with family members. Others rent apartments—paying, on average, 37% of their monthly income in rent.

Of those young respondents who were homeowners in Beijing, fully three-quarters said they received substantial help from their parents or other family members. And of those, 25% said their parents had paid the full price of their home outright in cash. The financial wherewithal of the prior generation is “playing a decisive role” in determining which young people are able to sign property deeds, as “support from parents is a crucial way to obtain a house,” the report concluded. In other words, class mobility is apparently shrinking—at least for young people trying to make it on their own in China’s most expensive cities.

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Hm. WHo are they going to sell it to? And at what price? And what happens to the double digit interest rate shadow loans?

China Provinces Eye Sales From $7 Trillion Asset Holdings (Bloomberg)

President Xi Jinping’s plans to open China’s state-owned enterprises to competition are spurring local officials to consider asset sales that could help rein in provincial and municipal debt. Businesses controlled by local administrations, which range from hotels to retailers to power generators, had assets of 43.8 trillion yuan ($7 trillion) as of the end of March, according to Ministry of Finance estimates. The southern provinces of Guangdong, which has the biggest regional economy, and Guizhou pledged this year to look at changes in ownership structures for their holdings in coming years.

With the central government setting direction, such as through the transfer of assets at Citic Group Corp. to its Hong Kong-listed unit, a “quiet wave” of stake sales by local authorities may come in 2015-16, according to Standard Chartered Plc. Productivity gains from revamping public-sector businesses would help China counter its investment-led slowdown. “The movement on this has happened at a surprisingly fast pace,” said Andrew Batson, an analyst in Beijing at researcher Gavekal Dragonomics who has covered China since 1998. “Local governments have these huge off-balance-sheet debts, so they have a much stronger incentive than the central government necessarily does to try to raise cash from asset sales.”

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Hello New Zealand.

China Imposes New Limits On Foreign Dairy Imports (NY Times)

The Chinese government has imposed new limits on foreign brands of milk powder and infant formula sold in China, according to reports on Monday by the state-run news media. The restrictions appear to be the latest attempt by the government to reduce the enormous demand for foreign-made dairy products and bolster the sales of domestic brands. The new restrictions require foreign makers of milk powder to register the products, as well as their manufacturing and storage centers, with the government before the products can be sold in China.

On Monday, The Beijing News released a list of the 41 foreign companies and manufacturing sites that have been registered so far. It includes subsidiaries of Nestlé, a Swiss company, in Germany and the Netherlands; Wyeth Nutrition, a company that Nestlé recently bought from Pfizer, in Ireland; Abbott Laboratories, an American company, in the Netherlands; and Nutricia, owned by Danone of France, in New Zealand, Germany and the Netherlands. The list could expand as more companies apply to register their products with China’s General Administration of Quality Supervision, Inspection and Quarantine.

The new rule officially went into effect last Thursday. A month before, the government began requiring foreign makers of milk powder to put Chinese-language labels on products intended for sale in China before the products were shipped to the country. The Beijing News quoted a dairy industry expert who said that the government was trying to stop “illegal” brands from being sold in China and to allow only large, trusted brands into the market. The demand in China for foreign-made infant formula and milk powder surged in 2008, when at least six babies died and more than 300,000 children fell ill after drinking milk products tainted with melamine, a toxic chemical used in manufacturing. Government officials prevented Chinese news organizations from reporting the deaths and illnesses until after the end of the Beijing Summer Olympics, leading to accusations of a government cover-up. Later, the government suppressed calls by grieving parents for a thorough investigation.

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UK Energy Too Cheap, Says Study (Guardian)

The government must urgently establish a strategic authority to oversee the future growth of Britain’s ageing energy infrastructure, a study argues on Tuesday . Academics at Newcastle University challenge the government’s market-based approach, saying the £100bn needed to secure energy security is not being delivered by a fragmented system that lacks central direction. The academics, led by Prof Phil Taylor, argue that the country needs a “systems architect” and that energy, at least for the bulk of the population, is too cheap, which is leading to waste.

While the Labour party has already said it wants an energy security board, one leading figure in the industry has said that Taylor was highlighting that “nobody is in charge” of the country’s energy policy. Before Tuesday’s launch of the university’s latest energy briefing note, Taylor, who leads its Institute for Research on Sustainability, said: “The current pricing model does not accurately reflect the high economic and environmental cost of generating, storing and distributing energy. In fact, because of the way energy is sold today, it becomes cheaper the more we use. This is unsustainable. “Although we must make sure people can afford to heat their homes, for the majority of us energy is actually too cheap – this is why we leave lights on, keep appliances running and use machines at peak times when energy costs more.”

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“The last refuge of the desperate”.

Self-Employment Surge Hides Real Story Behind Upbeat UK Job Figures (Guardian)

Coalition claims that “more people are in work than ever before” have been undermined by a report that shows the number of traditional employee jobs is falling or flatlining across the country – a phenomenon masked by an explosion in recorded self-employment which one economist describes as “the last refuge of the desperate”. Only London has shown a marked rise in employee jobs in the last six years, according to new analysis by the independent thinktank the Resolution Foundation, seen exclusively by the Guardian.

The research reveals that the total number of employed jobs fell in nine of 12 regions between 2008 and 2013, ranging from a drop of 156,000 posts in Scotland, to a fall of 24,000 in the east Midlands. The numbers of employee jobs in the south-east (-1,000) and eastern region (+4,000) remained virtually static, while in London, uniquely, 285,000 were created. Any increase in the number in work in other regions over the 2008 baseline, after four years of recovery, was due to rising rates of self-employment, which was up everywhere except Northern Ireland.

The number of self-employed jobs rose by 116,000 in the south-east, by 85,000 in London itself, by 67,000 in the east and by 61,000 in the west Midlands. The 58,000 additional self-employed posts in the south-west and 43,000 in the east Midlands were sufficient to offset the loss of employed jobs locally. The labour market economist and former Bank of England rate-setter David Blanchflower, who has studied trends in self-employment for many years, said: “Particularly after a prolonged downturn, there is a well-documented pattern of people failing as jobseekers and then moving into self-employment status, often out of desperation rather than anything more positive.”

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Don’t Brits still just like the idea of a ruling class?

Welcome To Britain, The New Land Of Impunity (Monbiot)

When I first worked in Brazil in the late 1980s, the country was widely described as o pais da impunidade – the land of impunity. What this meant was that there were no political consequences. Politicians, officials and contractors could be exposed for the most flagrant corruption, but they remained in post. The worst that happened was early retirement with a fat pension and the proceeds of their villainy safely stashed offshore. It is beginning to look a bit like that here. This is not to suggest that the people or companies I name in this article are crooked or corrupt; it is to suggest that the political class no longer seems to care about failure.

The failure works both ways, of course. As Polly Toynbee has shown, the Help to Work pilot projects, which G4S will run, reveal that it is a complete waste of time and money. Yet the government has decided to go ahead anyway, subjecting the jobless to yet more humiliation and pointlessness. Contrast the boundless forgiveness of G4S to the endless castigation for being unemployed. A record of failure reflects the environment in which such companies are hired: one in which ministers launch improbable schemes then look the other way when they go wrong. G4S had to pay back so much money for the phantom criminals it wasn’t monitoring because it had been doing it for eight years, and no one in government had bothered to check. There is no such thing as failure any more, just lessons to be learnt.

Accountability has always been weak in the UK, but under this government you must make spectacular efforts to lose your post. At the Leveson inquiry in May 2012, the relationship between the then culture secretary Jeremy Hunt and the Murdoch empire that he was supposed to be regulating was exposed in gory detail. He was meant to be deciding impartially whether to allow the empire to take over the broadcaster BSkyB, but was secretly exchanging gleeful messages with James Murdoch and his staff. We all knew what it meant. The emails, the Guardian observed, were likely to “sever the slim thread connecting Hunt to his cabinet job”. “After this he’s toast … it’s over for Hunt,” wrote Tom Watson MP. Ed Miliband said: “He cannot stay in his post. And if he refuses to resign, the prime minister must show some leadership and fire him.” We waited. Hunt remained culture secretary for another four months, then he was promoted to secretary of state for health.

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“You all know each other. You work together. You trade with each other. You are part of this little clique and we the ordinary taxpayer lose out on it.”

There’s No Proof That Privatisation Works, But Britain Keeps Selling (Guardian)

If you think the government might hesitate to sell other national assets after the Royal Mail fiasco, think again. The Land Registry, the office that certifies property ownership, a quasi-judicial function, is being readied for privatisation. It collates data on prices and transactions and catches fraudsters. It has cut its fees, scores 98% satisfaction and last year made a £98.7m profit for the Treasury – yet it’s part of this government’s £20bn asset sell-off. In the Royal Mail debacle, shares sold at £1.7bn rose to £2.7bn. The 16 investors chosen as “long-term” custodians included the most wolfish hedge funds, who sold the shares at once. Let’s hope that ends any pretence that shareholders look after companies.

What’s more, the investment arm of Lazards, key adviser to Vince Cable, was also given “priority” status. But Lazard Asset Management sold its entire stake within a week at a profit of £8m. Likewise Goldman Sachs, employed to facilitate the sale, told its investors share prices would hit 610p a month after advising the government to float at 330p. How well these companies deserved their tongue-lashing from Margaret Hodge: “You all know each other. You work together. You trade with each other. You are part of this little clique and we the ordinary taxpayer lose out on it.” This is a case of caveat vendor.

We should beware the inherent asymmetry when the state sells contracts and assets. On the government side, this is negotiating with a political gun at the head, conducted by inexperienced civil servants told to secure complex objectives, unable to walk away from already announced sell-offs. On the market side is rat-like native cunning impelled by profit, willingness to give mendacious assurances with one easy objective – to make money. Governments will always need to deal with markets for procurement and regulation – but that needs a strong, experienced civil service with equal cunning, not one cut by 30%, losing memory of past errors.

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Jim Kunstler quotes me…

Lying or Just Stupid? (Jim Kunstler)

• It’s not always easy to define what exactly is wrong with America, but what ever it is, it’s huge.
— Raúl Ilargi Meijer, The Automatic Earth.com

• Nobody knows, from sea to shining sea, why we’re having all this trouble with our Republic.
— Tom McGuane, Ninety-Two in the Shade

Despite its Valley Girl origins, the simple term clueless turns out to be the most accurate descriptor for America’s degenerate zeitgeist. Nobody gets it — the “it” being a rather hefty bundle of issues ranging from our energy bind to the official mismanagement of money, the manipulation of markets, the crimes in banking, the blundering foreign misadventures, the revolving door corruption in governance, the abandonment of the rule-of-law, the ominous wind-down of the Happy Motoring fiasco and the related tragedy of obsolete suburbia, the contemptuous disregard for the futures of young people, the immersive Kardashian celebrity twerking sleaze, the downward spiral of the floundering classes into pizza and Pepsi induced obesity, methedrine psychosis, and tattooed savagery, and the thick patina of public relations dishonesty that coats all of it like some toxic bacterial overgrowth. The dwindling life of our nation, where anything goes and nothing matters.

It’s not just the individual cluelessness of ordinary people leading lives too frantic for a moment’s reflection about anything, but the appalling institutional cluelessness of enterprises where you’d think combined intellects might tend toward a more faithful view of reality. But these days all we get is a low-order of wishful and clownish group-think, such as this item from today’s New York Times discussing a proposed reversal of Gazprom pipelines along the Ukraine / Slovakian frontier as the solution to the Kiev government’s fuel problem:

Nearly all the gas Washington and Brussels would like to get moving into Ukraine from Europe originally came from Russia, which pumps gas westward across Ukraine, into Slovakia and then on to customers in Germany and elsewhere. Once the gas is sold, however, Gazprom ceases to be its owner and loses its power to set the terms of its sale.

Get that? To avoid depending on Russian gas, they’re going to buy Russian gas from sources other than Russia. What New York Times editor can read this story without spraying her video display with coffee? What genius in John Kerry’s “Haircut-in-Search-of-a-Brain” State Department dreamed up this dodge? Who would think that you could improve a Chinese fire drill by tacking on a Polish blanket trick (i.e. trying to make your blanket longer by cutting a foot from the top and sewing it onto the bottom).

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I do look this.

New York City To Spend $41 Billion On Affordable Housing (CNBC)

New York City mayor Bill de Blasio has unveiled a 10-year plan—that will cost $41 billion—add 200,000 apartments to one of the most expensive and crowded housing markets in America. The plan aims to create enough housing to serve more than half a million New Yorkers. About 40% of the units will be newly built, while the remaining 60% will be “preserved”—which can mean anything from repairing and renovating existing affordable housing to protecting tenants from rising rents or eviction. It will also double the budget of the city’s Housing Preservation and Development agency, and will be funded through taxes, loans and money from private investors.

More than three quarters of these units will go toward households considered “low income” or poorer. About the 22% of the remaining apartments will go to moderate and middle-income New Yorkers, (which includes families of four making anywhere from $68,000 to nearly 140,000 annually). More than half of all New Yorkers pay more than 30% of their income toward rent, and about 35% of the city’s poorest—those who make less than about $42,000 a year—pay more than half of their income, according to figures cited in the plan. The complex plan will not just involve construction. The other initiatives include securing affordable housing in neighborhoods at risk of rising rents, providing tax incentives for building owners and subsidizing energy efficiency retrofits in existing buildings.

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When you read the entire article, a very peculiar picture emerges. German parliamentarians who are threatened with criminal liability in the US for wanting to hear Snowden?!

Merkel Sacrifices NSA Investigation For Unity On Ukraine (Spiegel)

In the world of diplomacy, moments of candor are rare, obscured as they are behind a veil of amicability and friendly gestures. It was no different last Friday at the meeting between US President Barack Obama and German Chancellor Angela Merkel in Washington. Obama welcomed Merkel by calling her “one of my closest partners” and a “friend” and took her on a tour of the White House vegetable garden as part of the four hours he made available. He praised her as a “strong partner” in the Ukraine crisis and thanked her many times for the close cooperation exhibited in recent years.

The birds in the Rose Garden sang happily as the president spoke. But then Obama made clear who had the upper hand in this wonderfully harmonious relationship. When a reporter asked why, in the wake of the NSA spying scandal, the no-spy deal between Germany and the US had collapsed, Obama avoided giving a clear answer. He also dodged a question as to whether Merkel’s staff is still monitored. Instead, he stayed vague: “As the world’s oldest continuous constitutional democracy, I think we know a little bit about trying to protect people’s privacy.” That was it.

Merkel, when asked if trust had been rebuilt following the NSA revelations, was much less sanguine. “There needs to be and will have to be more than just business as usual,” she said. If accepting defeat with a smile on one’s face is part of political theater, then Angela Merkel delivered a virtuoso performance. As recently as January, she delivered a sharply worded speech to parliament on the tactics used by US intelligence. “An approach in which the end justifies the means – one which employs every technical tool available – violates trust. It sows distrust.” She added: “I am convinced that friends and allies should also be able and willing to cooperate when it comes to defending against outside threats.”

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I’ll say it one more time: Shale is about land speculation, not energy. The energy part is only a passing phase.

No Gas No Problem for Shale Pipelines Backed by Private Equity (Bloomberg)

Pipeline companies have come down with shale fever. They’re so eager to grab a stake in the U.S. energy boom that they’re building transmission networks before getting the traditional commitment from drillers that anyone will actually use them. Instead of negotiating guarantees from drillers that they’ll pay fees or pump a minimum volume of oil and gas through their systems, pipeline companies such as Eagle Rock Energy Partners LP and Oryx Midstream Services LLC say they are signing agreements based on the acreage of the fields the producers plan to drill. Producers are getting away with it because there’s more competition to ship as domestic crude-oil output has risen to its highest level since 1988.

“There’s an assumption, and I’m not sure it’s exactly valid, that acreage will equal volume,” said Allen Gilmer, chairman and chief executive officer of Austin, Texas-based Drillinginfo Inc., which tracks wells. “I’d sure as heck want to have a volume consideration.” Six years into the shale-driven energy boom, pipeline companies, many of them backed by private-equity funds, are taking on the risk usually shouldered only by drillers — if the wells come in, they can reap a bonanza. If not, they face losses. Infrastructure firms have historically been less vulnerable to energy-price changes and unpredictable wells.

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Money trumps it all.

Rosneft And ExxonMobil Approve 4 Arctic Projects (RT)

Rosneft, one of the world’s largest oil companies, has given the go ahead on four Arctic projects with US oil giant ExxonMobil, despite the US government’s attempt to derail business relations with sanctions. The two companies will develop hydrocarbon reserves in the Arctic waters of Russia, including the Laptev and Chukchi Seas, Rosneft said in a statement Monday. The projects will explore and develop four licensed oil-rich reservoirs: the Anisinsk-Novosibirsk and Ust-Olenksk shelf sites in the Laptev Sea zone, as well as the North-Wrangel-2 and South-Chukchi shelf reserves, the statement said. No financial details were provided. Rosneft also plans to team up with Texas-based ExxonMobil to explore the remote Kara Sea in August.

Only Russian state-owned companies can obtain licenses to explore the Arctic, which has oil reserves estimated at 90 billion tons, or 13% of the world’s supply. Natural gas reserves stand at 1.67 trillion cubic meters, or 30% of the world reserves, and liquefied natural gas weigh in at 44 billion barrels, or 20% of potential reserves. Abundant and untapped, oil and gas above Russia offers a great investment opportunity, but at the same time, it is expensive and laborious to explore and drill in the harsh Arctic climate, which is only possible in three short summer months. The most recent round of US-led sanctions against the Russian economy put Igor Sechin, the CEO of Rosneft, but not the company, under sanctions. If further sanctions are pursued and the company itself is targeted, it could complicate business in Russia.

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Hey, it’s 86 years till 2100. Burn, baby, burn.

‘Uncorking’ East Antarctica Could Mean 10 Foot Sea-Level Rise (Discovery)

The melting of a small area of ice on the shore of East Antarctica could lead to sea level rise for thousands of years, reports a new study. The study appears in Nature Climate Change by scientists from the Potsdam Institute for Climate Impact Research (PIK). “East Antarctica’s Wilkes Basin is like a bottle on a slant,” said lead-author Matthias Mengel in a statement. “Once uncorked, it empties out.” A rim of ice currently holds back the largest region of marine ice on rocky ground in East Antarctica. Warming oceans could lead to loss of ice on the coast, while the air over Antarctica stays cold, the researchers say. If this rim is lost it could trigger sea-level rise of 300-400 centimeters (about 10-13 feet) the researchers report.

Sea level rise from Antarctica is projected to increase by 16 centimeters this century. “If half of that ice loss occurred in the ice-cork region, then the discharge would begin. We have probably overestimated the stability of East Antarctica so far,” said co-author Anders Levermann. Computer simulations of the region show it would take 5,000-10,000 years for the basin to discharge completely. But once started the basin would empty, even if global warming was halted. “This is the underlying issue here,” said Matthias Mengel. “By emitting more and more greenhouse gases we might trigger responses now that we may not be able to stop in the future.” Rising sea level could put coastal cities at risk, including Tokyo, Mumbai or New York, the researchers said.

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Apr 222014
 April 22, 2014  Posted by at 3:45 pm Finance Tagged with: , ,  4 Responses »

Edwin Rosskam Workers and hurricane shelter in tobacco field, Puerto Rico January 1938

Once more for everyone who’s got even the lightest slightest shade of green in their thoughts and dreams and fingers, I’ll try and address the issue of why going or being green is a futile undertaking as long as it isn’t accompanied by a drive for a radical upheaval of the economic system we live in. Thinking we can be green – that is to say, achieve anything real when it comes to restoring our habitat to a healthy state – without that upheaval, is a delusion. And delusions, as we all know all too well, can be dangerous.

It’s not possible to “save the planet” while maintaining the economic system we currently have, because that system is based on and around perpetual growth. It’s really as simple as that, and perhaps it’s that very simplicity which fools people into thinking that can’t be all there is to it. Switching to different fuels, alternative energy forms, is useless in such a system, because there will be a moment when the growth catches up with all preservation measures; it’s not a winnable race. There will come a time when a choice between preservation and growth must be made, and the latter will always win (as long as the system prevails). It would be very helpful if the environmental movement catches up on the economics aspect, because it’s not going anywhere right now. It’s a feel-good ploy that comforts parts of our guilty minds but won’t bring about what’s needed to eradicate that guilt.

If you’re serious about preserving the world and restoring it to the state your ancestors found it in, it’s going to take a lot more than different lightbulbs or fuels or yearly donations to a “good” cause. That, too, is very simple. You won’t be able to keep living the way you do, and preserve the place you have in your society, your job, your home, your car. That is a heavy price to pay perhaps in your view, but there is no other way. Whether you make that choice is another story altogether. Just don’t think you’re going to come off easy.

What makes it harder is the question whether we, as a species, are capable of pulling this off in the first place. Still, if we can’t even get it right as individuals… But trying to answer what it would all take, in reality, is still preferable than telling ourselves, and each other, and your children, a bunch of fiction-based lies on a daily basis. At least, that’s my take. Either we make an honest attempt or we say “after us the flood”. Trying to find a snug and comfy but cheating place somewhere in between is an insult to ourselves, our ancestors and our progeny.

I read a number of things this morning that, in typical fashion, all sort of touch on all this, as so many do all the time, but still fall short of the logical conclusion. For many, that’s because perpetual growth is a hard to grasp concept, and an economic system based on it is even more difficult, but it’s a terrible shame that it leads to all those well-meaning people producing what is in the end really little more than gibberish. Jeremy Brecher gets it partly right for the Nation,

‘Jobs vs. the Environment’: How to Counter This Divisive Big Lie

While concrete, on-the-ground solutions are essential for knitting together labor and environmental concerns, our movements also need to evolve toward a common program and a common vision. We can present such initiatives as exemplars of a broad public agenda for creating full employment by converting to a climate-safe economy. There are historical precedents for such programs. Just as the New Deal in the Great Depression of the 1930s put millions of unemployed people to work doing the jobs America’s communities needed, so today we need a “Green New Deal” to rebuild our energy, transportation, building, and other systems to drastically reduce the climate-destroying greenhouse gas pollution they pour into the air.

Such a shared program would end the “jobs versus environment” conflict because environmental protection would produce millions of new jobs and expansion of jobs would protect the environment. Such a program provides common ground on which both labor and environmentalists can stand. Such a program can also be the centerpiece of a larger shared vision of a new economy. After all, just expanding the kind of economy we have will just expand the problems of inequality and environmental catastrophe our current economy is already creating. The ultimate solution to the “jobs vs. environment” dilemma is to build a new economy where we all have secure livelihoods based on work that creates the kind of sustainable world we all need.

… but the notion that expansion, any kind of expansion, would protect the environment is dangerous. Expansion is part of the other side’s vocabulary. And using their vocabulary is not a good thing. George Monbiot quotes George Lakoff to make that exact point:

Can You Put A Price On The Beauty Of The Natural World?

George Lakoff, the cognitive linguist who has done so much to explain why progressive parties keep losing elections they should win, explained that attempts to monetise nature are a classic example of people trying to do the right thing without understanding frames: the mental structures that shape the way we perceive the world. As Lakoff points out, you cannot win an argument unless you expound your own values and re-frame the issue around them.

If you adopt the language and values of your opponents “you lose because you are reinforcing their frame”. Costing nature tells us that it possesses no inherent value; that it is worthy of protection only when it performs services for us; that it is replaceable. You demoralise and alienate those who love the natural world while reinforcing the values of those who don’t.

And the rest of Monbiot’s piece is sort of alright, but his from the rooftops support for more nuclear (in Britain) shows that he, like so many others, only gets part of the story.

… the financial case for new roads in the United Kingdom, shaky at the best of times, falls apart if you attach almost any value to the rise in greenhouse gases they cause. Case closed? No: the government now insists [..] that climate change cannot be taken into account when deciding whether or not a road is built. Do you believe that people prepared to cheat to this extent would stop a scheme because one of the government’s committees has attached a voodoo value to a piece of woodland?

It’s more likely that the accounting exercise would be used as a weapon by the developers. The woods are worth £x, but by pure chance the road turns out to be worth £x +1. Beauty, tranquillity, history, place, particularity? Sorry, they’ve already been costed and incorporated into x – end of discussion. The strongest arguments that opponents can deploy – arguments based on values – cannot be heard.

This line of thinking should be applied not just to nature, but to all basic human necessities as well, food, water, shelter, and yes, even the energy that keeps us warm. I have often said that if you allow money into your political system, money will inevitably end up owning that system. And that is true for all resources too: in an economic perpetual growth model, money, if allowed to, will concentrate in just a few institutions and families and eventually own everything. Didn’t Marx, too, say something like that a while back?

And I could go on, but I already wrote it all several times, for instance on May 27 2008, and nothing has changed since. At least not for the good. And so here goes. I wrote this in reaction to an otherwise great article in Der Spiegel entitled: The Price of Survival: What Would It Cost to Save Nature?.

I still really like that Spiegel article, except that it’s wrong on many counts. Here’s from 6 years ago (and yes, I know there are things in it I have mentioned more recently as well):

What Is The Earth Worth?

Another great article from German magazine Der Spiegel. It has one huge problem, though: it is based on ideas and assumptions that are so wrong and misguided they can only do harm. We can not buy back our world, and we can not restore or save it with money. As long as we keep stating the earth’s value in monetary terms, we are irrevocably doomed. If you accept that you come from, and belong to, the world around you, and understand that Darwin has delivered proof that (wo)man has come from all that has been before, that 90% of our genes are identical to those of our pets and so on, than putting a dollar price on plants and animals and rivers and skies is identical to putting a dollar price on your own life, and on your children and loved ones. Everything alive is a part of you. Dollars are not.

In our economic system, based on debt, credit and interest, the future value of everything under the sun necessarily gets discounted over time. That is because currencies lose their value over time. It’s also in our genes: we prefer what we have now over what we might have later. Our ancestors were the ones who focused on immediate threats. Those who focused on future ones, in general didn’t live long enough to procreate.

There is an economist in this article who says: “Protecting diversity is much cheaper than allowing its destruction.” He’s wrong, because of what I just said: all future values are discounted, so destruction is more profitable than preservation. This economist has never grasped the essence of his own chosen field.

The article continues: “Biodiversity – and efforts to preserve it – could in fact become an enormous business in the future”. See, that’s the rub right there, in the word ‘could’, [sometime] in the future . In the here and now, using and destroying all we can get our hands on is the only thing that makes sense economically. If that is hard to wrap your mind around, wait till you get hungry, and you face the choice between eating or protecting diversity. You’ll eat.

The only things in the natural world that have a value in our economics are those that can be sold at a profit, today; and that is all the value they have. All else is luxury. Preservation only has a chance in times of plenty, and even then only in theory. After all, we are today coming out of the by far most plentiful time in human existence, but it has not exactly been a time of preservation. Quite the contrary, it has both led to, and was accommodated by, the worst destruction of the natural environment ever in history. That is not a coincidence; it’s destruction that gave us our riches.

Now, we are entering a much poorer time economically, and that will lead to an even worse destruction, if only because the riches made us multiply like so many rabbits.

As long as our world views emanate from an economic system based on perpetual growth, there is, after the short high we are now leaving, no way but down and worse. We would need to take food, water and indeed the entire natural world out of any and all profit calculations, or they’ll all be devoured in time by the ever-growing credit monster that requires us to pay interest over every breath we take, every plant we grow, every meal we eat, and every house we build. As long as we run our societies on that system, there is no other possible outcome than what we are witnessing today.

To fully understand this, you need to shake off your dreams and illusions about preservation and doing good, and take a good hard open look at the numbers on extinctions and environmental degradation. People have been talking about saving the planet for a long time, but it all deteriorates. And not just that, the deterioration accelerates.

Groups like Greenpeace are almost religiously accepted as being highly beneficial, but in reality are some of the worst players around, since they facilitate the perpetuation of the lies and illusions about saving and preserving, while the house is on fire. Donating to them is like paying the church to be absolved of your sins. That makes them guilty, if not of perpetrating crimes outright, then certainly of aiding and abetting, of being accomplices to the foul deed. Good intentions don’t buy you salvation, not when they’re built on illusions that serve only to make you feel good.

If we are to save this planet, we will have to throw out the economic model. But that is an issue utterly absent from any green program. Green movements indeed are but modern religions, far removed from reality, unable to grasp what happens right before their eyes, focused instead on making those who donate feel good, on keeping the false idea alive that we can continue to live close enough to the way we do and save the planet at the same time.

Man is like yeast, which destroy their own living environment when given the chance. At least yeast have the excuse that they can’t think. Man can think, but is still incapable of understanding that thinking does not control his actions. What does drive us to do what we do, happen to be the same things that drive yeast: billion-year-old primitive instincts with no regard whatsoever for the future. We discount the future in the exact same way that our economic system does. That system is ideally fitted for how our brains function, and that will make it near impossible to get rid of it before it’s too late.

Being able to think equals being able to lie, to lie to ourselves and others about why we do what we do. That makes man both the most tragic and the most destructive animal ever assembled by evolution. As such, we are a unique success story.

I’ve often wondered why it is, and what it means, that man allows himself to destroy the world his children need to live in after he’s gone. What does that say about the idea of “love for your progeny”? It drags down that love to the level of some semi-automated, genetically predetermined (re-)action, like a cat that licks her kittens; but that’s where love stops, for man and cat. But yes, it can be puzzling at first glance: while they obliterate the natural world without which their sons and daughters have no chance of survival, most parents would die to save their kids from a fire today. And there is the essence: it’s about today. We are no better at “doing future” than yeast is.

“But now a revolution is taking shape in the way we think”, claims the article, citing the value of biodiversity to our economic model. “the economic weapon must shoot in the right direction.”But that weapon can only shoot in one direction, there’s no reverse, no steering wheel, and it’s short-range only. The sole chance we have is to take out that “economic weapon” altogether, not try in vain to point it in the “right” direction. We shouldn’t have multinationals giving money to the Congo, we should make sure no multinational ever sets another foot there. For every dollar they donate, they destroy a hundred; that is solidly engraved in the system.

I will gladly admit I cannot say this better than Herman Daly and Kenneth Townsend did in their 1993 book “Valuing the Earth” (note how similar the title is to those of this post and the original Der Spiegel piece):

“Erwin Schrodinger (1945) has described life as a system in steady-state thermodynamic disequilibrium that maintains its constant distance from equilibrium (death) by feeding on low entropy from its environment—that is, by exchanging high-entropy outputs for low-entropy inputs. The same statement would hold verbatim as a physical description of our economic process.

A corollary of this statement is that an organism cannot live in a medium of its own waste products.”

I know it’s the second time in a week that I quote Daly and Townsend, but that’s because I hope everyone will try to understand what it means: that in the end, it’s the use of energy, the amount, that counts, far more than what kind of it. Our present economic system depends for its survival on our using ever larger amounts, and we have the drive to do just that; it will take a very serious effort to resist that drive, and even then there’s no guarantee the rest of mankind will do the same. But anything else, any well intentioned green initiative, is useless and futile and in the end pretty stupid, good only for some instant gratification for that part of the brain that seeks to “do good”, a cheating way to feel less guilty about destroying everything around us, for telling our kids we love them and then leaving them only with smouldering remains, empty rivers and oceans, undrinkable water, infertile soil and sky high mountains of plastic, steel and aluminum. And I don’t know that we can do better than that, but we can at least start by not fooling ourselves into some tempting illusionary comfort zone. Or we can just give up, that’s an option too.

Way to go Bill.

The Fed’s $33 Trillion Bent Spoon Trick (Bill Bonner)

It looks as though the US stock market is in the process of topping out. But if you’d bet heavily on a bear market, each time you saw one coming, you’d be broke by now. We will wait to see what happens… Meanwhile, we are still puzzling over the miracle produced by the Fed. Uri Geller could bend spoons. The Fed bends the entire economy. Hardly a single price is unaffected. Hardly a single business plan or investment strategy goes forward without an eye on the central bank.

Jesus turned water into wine and multiplied loaves and fishes. But the Fed make the Nazarene seem like a two-bit shell game hustler. The loaves and the fishes couldn’t have had a market value of more than a few thousand shekels! Compare that to the Fed. It helped usher in $33 trillion worth of goods and services – out of nothing. Yes, dear reader, that is the total amount of purchases made over the last 30 years… on excess credit. We say “excess” because it is above and beyond the level of credit that had existed – relative to GDP – for many decades before. Roughly, from 1900 to 1970, the US had $1.50 for every dollar of output. Now, there is about $3.50 per dollar of GDP. The difference, over the last 30 years, is about $33 trillion.

Where did all that bounty come from? That is the question. Can something really come from nothing? Ex nihilo nihil fit (nothing comes from nothing). And yet $33 trillion worth of “stuff” seemed to have come from out of nowhere. It didn’t come from savings; the savings rate went down during this period. It didn’t come from earnings, either. Wages and earnings – in real terms – barely rose since the 1970s. How about from an increase in productivity or output? Nope. As we have seen, compared to output, this “wealth” grew much faster. That leaves only one possible source…

You may think banks lend out savings. Un un. In the modern fiat money-based economy, they create credit out of thin air. The money supply goes up when the banks see fit to make loans. And banks no longer set aside meaningful reserves against their loans. So, the limit to new credit is… well… limitless. This entire system is created by and presided over by the Fed – a public cartel of private banks. And that’s a worry. Because, as we put it last week, the Fed’s theory – that it can build real wealth by increasing credit faster than GDP forever – is “childishly naïve.” An old friend, Pierre Lemieux, wrote in with the following comment:

“The production of things is not done with money, but with real resources. If I see a car, I know it has been produced with steel, aluminum, plastic, labor, etc. That‘s the real side of the economy. We get on the financial side when we ask how this production was financed, that is, how people were motivated to release control of real resources. In most cases, they are motivated in doing so by receiving in exchange claims to other resources or consumer goods. Finance is the domain of the exchange of claims to real resources. The question, then, is in which circumstances does money (a very liquid claim on real resources) help production (by reducing transaction costs), hinder it or, as you point out, create gainers and losers?”

In a better world, credit depends on savings… which represent real resources. This restrains credit growth, because there are only so many real resources… and only so much savings representing them. But in the world created by the Fed, credit has no savings behind it. It is just notations in the banking system… with no effective limit on the quantity of credit available. That is how $33 trillion came to exist. It pretended to be real savings… representing real resources… which were then put to work to make the autos and houses that people wanted, but couldn’t afford. In other words, the system created new claims on resources… which drew resources into the real economy. Neither past earnings (savings), nor current earnings (output) supported this economic expansion. Instead, it was all a claim on future earnings.

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Strange sudden change.

JPGoldman Stanley Intact as Sudden Basel Change Keeps Bank Ties (Bloomberg)

The largest U.S. banks can remain entangled with each other now that global regulators have loosened proposed limits on the financial web that led to investor panic in 2008 and prompted bailouts. The Basel Committee on Banking Supervision, which set out a year ago to block banks from relying too heavily on each other, changed course last week, opting to let firms preserve most derivatives and repurchase agreements among themselves. The panel revised formulas for evaluating exposure and used a broader definition of capital. Those tweaks spare about $1 trillion in deals at seven of the biggest U.S. banks that would have exceeded proposed limits, according to a November study by the Clearing House, an industry group.

The Basel panel of regulators from 27 countries has bowed to industry pressure before to weaken new rules. Liquidity standards and leverage ratios also were altered so the largest firms came much closer to being in compliance. “That seems to be the name of the game, fighting every rule to the ground,” said Anat Admati, a Stanford University finance professor. “The fact that the banks were so concerned with counterparty limits and fought them so hard shows how interconnected they are. That makes them too big to fail.”

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To be continued.

China Bad-Loan Ratio Rises ‘Significantly’ (Bloomberg)

China’s bad-loan ratio rose “significantly” in the first quarter, increasing risks for the nation’s banking industry, according to the nation’s largest manager of soured debt. The business environment this year has been “grim and complicated” as lenders face pressures on asset quality, liquidity and lending margins, China Huarong Asset Management Co. Chairman Lai Xiaomin said during an internal meeting on April 15, according to a statement today on the website of the Beijing-based company. China’s slowing economy has made it tougher for borrowers to repay debt, driving up banks’ sour loans for a ninth straight quarter as of December to the highest level since 2008, data from the banking regulator show.

New nonperforming loans amounted to more than 60 billion yuan in the first two months of this year, compared with 100 billion yuan for all of 2013, China Business News reported on April 9, citing people it didn’t identify. “The economic indicators we’ve seen so far are quite disappointing and repayment risks are rising across sectors from property to small businesses due to weak demand,” Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp., said by phone. “Banks will be hit in such an operating environment but managers of bad assets like Huarong and China Cinda Asset Management Co. stand to benefit” because they can accumulate more sour loans, she said.

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House for sale.

Italy’s Big Banks In US Talks Over Bad Loans (FT)

Italy’s two biggest banks are teaming up with a U.S. private equity house and a restructuring adviser to pool some of their bad loans into a vehicle that will provide fresh capital for the struggling companies. UniCredit and Intesa Sanpaolo are expected to announce on Tuesday that they have signed a preliminary agreement with Kohlberg Kravis Roberts and Alvarez & Marsal in an attempt to turn round some of their troubled corporate borrowers. The move is a rare example of European banks teaming up with one of the many private equity houses and hedge funds circling the continent’s financial system in search of opportunities to snap up assets from capital-starved lenders.

Investment bankers say this year’s asset quality review and stress tests that the European Central Bank is carrying out are likely to prompt more of the continent’s lenders to sell assets, something they have resisted until recently. Tuesday’s announcement is expected to say the four groups have signed a memorandum of understanding but are still working out many of the details, although the vehicle could house several billion euros of loans.UniCredit and Intesa are considering how much of their bad loan portfolio to shift into the vehicle and whether to contribute fresh funds themselves. UniCredit last month became the first Italian lender to set up an internal bad bank, housing €87 billion ($120 billion) of Italian loans, two-thirds of which are impaired. It said that nearly €55 billion of the loans would be run down by 2018.

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PM Abe is going to look for money wherever he can find it.

Japan Overhauls Its Public Pension Fund, The World’s Biggest (Reuters)

Japan overhauled the world’s biggest public pension fund on Tuesday, appointing new committee members, in a push toward Prime Minister Shinzo Abe’s goal of a more aggressive investment strategy. The government announced a reshuffle of the Investment Committee of the $1.26 trillion Government Pension Investment Fund (GPIF), in line with Abe’s drive to have the fund make riskier investments and rely less on low-yielding government bonds. Global financial markets are keenly watching GPIF’s investment strategy as the fund, bigger than Mexico’s economy, is a huge investor and a bellwether for other Japanese institutional investors.

The new committee will play a leading role when GPIF sets its new investment allocation targets over the coming months. Abe has promised GPIF reform as an element of his growth strategy, the “third arrow” in his policy, following aggressive monetary and fiscal stimulus. Health Minister Norihisa Tamura, who appoints the GPIF Investment Committee members, shrank the panel to eight members from 10 as part of the overhaul. Two members retained their seats and one former member was brought back on. The panel retains a balance of academics and economists, with one representative each from the main trade union federation – whose pensions are at stake – and the biggest business lobby. But in a sign of Abe’s more aggressive strategy, three of the now eight members sat on the advisory panel that spearheaded a change in the fund’s strategy last year to achieve higher investment returns.

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China Court Impounds Japanese Ship in Unprecedented Seizure (Bloomberg)

A Shanghai court ordered the seizure of a Japanese ship owned by Mitsui OSK Lines as compensation for the loss of two ships leased from a Chinese company before the two countries went to war in 1937. The 226,434-ton Baosteel Emotion was impounded on April 19 at Majishan port in Zhejiang province as part of a legal dispute that began in 1964, the Shanghai Maritime Court and Mitsui OSK said in notices on their websites. The holding of the ship reflects strained ties between China and Japan amid a territorial dispute over an island chain and visits by Japanese politicians to a Tokyo shrine honoring that country’s war dead.

The move is the first time a Chinese court has ordered the seizure of Japanese assets connected to World War II, and could cast a pall over the countries’ trade, according to Shogo Suzuki, a senior lecturer at the University of Manchester in the U.K. who studies China-Japan relations. “Many of the major Japanese companies like Mitsubishi or Mitsui have existed through back to the pre-war era and could all be implicated in one way or another,” Suzuki said. “Japanese companies can’t extract themselves easily at this stage so I think they’ll be quite worried.” Disputes have increasingly shifted to the courts, with a Chinese judge accepting a lawsuit last month against two Japanese companies, including Mitsubishi Materials Corp. accused of using forced labor during the war.

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Property-Tax Collections Rising at Fastest Pace Since US Crash (Bloomberg

Property-tax collections are rising at the fastest pace since the U.S. housing market crash sent government revenue plunging, helping end an era of local budget cuts. In cities including San Jose, California, Nashville, Tennessee, Houston and Washington, revenue from real-estate levies has set records, or is poised to. Local governments are using the money to hire police, increase salaries and pave roads after the decline in property values and 18-month recession that ended in 2009 forced them to eliminate about 600,000 workers and pushed Detroit, Central Falls, Rhode Island, and three California cities into bankruptcy.

“‘The money is flowing back, but it’s not like an open spigot,” said Rob Hernandez, deputy administrator of Broward County, Florida, where property-tax revenue is set to rise 7% this fiscal year, though it remains below earlier peaks. “It’s trickling in.” Some localities that were hit hardest in the real-estate collapse, such as Clark County, Nevada, haven’t yet rebounded but forecast improvement in the next fiscal year. Property-tax collections nationally rose to $182.8 billion during the last three months of 2013, when much of the money is due, according to a U.S. Census estimate last month. That topped the previous peak four years earlier, before the decline in housing values reduced revenue. That increase helped boost collections for the year by 3% over 2012. That was the biggest gain since 2009, when revenue climbed 9%.

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Greek Austerity Causes One Male Suicide Per Day (Guardian)

Spending cuts in Greece caused a rise in male suicides, according to research that attempts to highlight the health costs of austerity. Echoing official statistics in the UK showing suicide rates are still higher than before the crisis, researchers at the University of Portsmouth have found a correlation between spending cuts and suicides in Greece. According to the research, every 1% fall in government spending in Greece led to a 0.43% rise in suicides among men – after controlling for other characteristics that might lead to suicide, 551 men killed themselves “solely because of fiscal austerity” between 2009 and 2010, said the paper’s co-author Nikolaos Antonakakis.

“That is almost one person per day. Given that in 2010 there were around two suicides in Greece per day, it appears 50% were due to austerity,” he said. Antonakakis, a Greek economics lecturer, said he had been prompted to look into a potential link between austerity and suicide rates after media stories and reports of friends of friends dying from suicide. Although there had been studies into the health effects of negative economic growth, there was a gap when it came specifically to spending cuts and health, he said. Antonakakis and his co-author, economics professor Alan Collins, said they were surprised at how many suicides appeared linked to austerity and how clear the connection was. [..]

Political economist David Stuckler and physician-epidemiologist Sanjay Basu pointed to soaring suicide rates, rising HIV infections and even a malaria outbreak in their book The Body Economic: Why Austerity Kills, published last year. But they argued that such costs were not inevitable and that, in some countries, countermeasures such as active labour market schemes had softened the blow from cuts. In Greece, however, HIV infection rose by more than 200% from 2011 as prevention budgets were cut and intravenous drug use grew as youth unemployment reached 50%. Greece also experienced its first malaria outbreak in decades after budget cuts to mosquito-spraying, the authors said.

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An opinion from Kashmir. We need some alternative views.

America Advertising its Impotence (M.I. Baht)

United States government has never given any credence to whatever appears in the alternate media – be it about 9/11 and the wars since, color revolutions, spying, torture, Syrian sarin gas attack, failed economy, jobs, growing domestic poverty and public anger, and so on. It always promotes its own narrative however contrary the facts may be or however impeccable the credentials of the contrary camp. One of the rather persistent themes highlighted by the alternate media over the past many years has been the decline in the US imperial power. But the USG, from President down to lowly State Department official, continue to see the world as their playing field. So does the Congress. In fact Congress has always been a step ahead – ever on lookout to force American laws and social norms worldwide.

In this background the candid admission by the Secretary of State John Kerry and the Senate Foreign Relations Committee that the US “superpower” days are over comes as a big surprise. As Bloomberg reported, Kerry admitted that despite “enormous power” the United States “can’t necessarily always dictate every outcome the way we want, particularly in this world where we have rising economic powers — China, India, Mexico, Korea, Brazil, many other people who are players.” This is precisely what President Vladimir Putin had warned Washington in his famous 2007 Munich Speech when he said, “I consider that the unipolar model is not only unacceptable but also impossible in today’s world.” Unfortunately it took 7 long years for the repository of global wisdom and leadership in Washington to realize this.

Nonetheless, this is a huge success for rest of the world given how arrogantly and unilaterally the US has been deciding world affairs post-Soviet Union, in the process turning Franklin Roosevelt’s dictum on its head by breaking peace not just at one place but everywhere in the world. But, is the admission of the “changed world” enough? Definitely not — neither for the rest of the world nor for the US itself — if the aim is world at peace. What is important is the acceptance by Washington that it is their own policies and actions founded on unbridled arrogance that forced the world to change. After all, as Putin put it, “There is a limit to everything.” Also, equally important is that Washington accepts that the US, too, has changed – it is broke economically, politically, socially and morally; it has lost credibility. It is not just others but even majority of its own people feel threatened by the USG.

Retired as Professor and Head, Department of Geology & Geophysics (which he founded in 2000), University of Kashmir, M. I. Bhat served for 20 years as a scientist at one of Indian premier research labs, Wadia Institute of Himalayan Geology, Dehra Dun.

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I agree.

Lavrov: US Should Face Responsibility For Powers It Installed In Kiev (RT)

The Russian Foreign Minister says the US should take responsibility for those whom they put in power instead of issuing ultimatums to Moscow. “Before giving us ultimatums, demanding that we fulfill demands within two or three days with the threat of sanctions, we would urgently call on our American partners to fully accept responsibility for those who they brought to power,” said Lavrov during a press conference with his colleague from Mozambique, Oldemiro Baloi. All attempts to isolate Russia will lead to a dead end because Russia is “a big, independent power that knows what it wants,” he added.

Meanwhile, the Russian FM also criticized statements from Western countries and Kiev’s authorities, which “invent possible and impossible arguments against Russia,” claiming that a large amount of Russian arms in the conflict zones proves Russian interference in Ukrainian affairs. He called the statements absurd as Ukraine has traditionally used Russian-made arms. “This statement is ludicrous. Everyone has Russian arms in Ukraine,” Lavrov said.

Meanwhile, he also said that TV outlets have reported that US arms were also found in Ukraine and illegal armed groups, not the Ukrainian army, were in possession of these American arms. Speaking about the crisis situation in eastern Ukraine and Kiev’s crackdown on the Donetsk region, Lavrov also said that Kiev authorities don’t want or maybe cannot control the extremists who continue to control the situation in the country. “The authorities are doing nothing, not even lifting a finger, to address the causes behind this deep internal crisis in Ukraine,” he said.

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Court Case May Help Define ‘Insider Trading’ (WSJ)

What is insider trading? A case pending before a federal appeals court could help define a financial crime that has been in the spotlight for the past few years. The outcome of the appeal, which centers on two former hedge-fund managers, could threaten some of the convictions won by prosecutors in their yearslong crackdown on insider trading. At issue in the appeal is whether, to be considered to have traded on confidential material information, a trader must have known the tip had been illegally disclosed in exchange for a reward.

The appeal is being pursued by Todd Newman and Anthony Chiasson, two portfolio managers whose 2012 insider-trading convictions were a significant victory for prosecutors. The two men, free on bail pending the appeal, are seeking to have their convictions overturned. Their case is scheduled to be heard Tuesday in the U.S. Court of Appeals for the Second Circuit in Manhattan. Messrs. Newman and Chiasson were so-called downstream tippees—meaning they didn’t receive information on technology companies Dell Inc. and Nvidia Corp. directly from its source, but were one or more layers removed. The original trial judge told jurors that Messrs. Chiasson and Newman could be convicted of insider trading even if they hadn’t known that the person who leaked the information had done so in return for a “personal benefit.”

Lawyers for Messrs. Newman and Chiasson say prosecutors must show that their clients knew the tippers were somehow compensated for the tips and that the judge’s instruction was erroneous. The inside tips on which the pair traded were conveyed through a network of analysts before reaching analysts who worked for Messrs. Chiasson and Newman, the lawyers said in court documents. Their clients didn’t seek out or knowingly use inside information, they said. Prosecutors have said they need only show that people who used the tips were aware the tipper disclosed the nonpublic information in breach of a fiduciary duty when they traded on it. Even if the instruction was erroneous, the jury would have concluded the two men inferred the information was given in exchange for a reward, prosecutors said in court documents.

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The sort of optimism we can do without.

US Senator: I Couldn’t Be Less Optimistic On A TPP Deal (CNBC)

Ahead of U.S. President Barack Obama’s visit to Japan this week, U.S. Senator Roger Wicker told CNBC he would be “shocked and delighted” if any progress was made on a much anticipated trade agreement between the two countries. Obama plans to visit Japan, the Republic of Korea, Malaysia and the Philippines in a week long visit starting on Tuesday, hoping to win back some favor in the region after the cancellation last October’s visit amid budget wrangling at home which was broadly seen as a snub.

Many anticipate that the visit will help facilitate progress on the U.S.-led Trans Pacific Partnership (TPP). The deal which has been under negotiation since 2010 aims to eliminate trade barriers between countries and boost trade relationships. The pact is seen as a crucial part of the U.S. government’s rebalance towards Asia, known as its ‘pivot.’ “I think it’s [this visit] largely symbolic,” Wicker, U.S. Senator for Mississippi and Republican Party member, told CNBC on Tuesday, in reference to Obama’s visit.

“We need the President to visit Japan every now and then to show our alliance but in terms of anything new, like progress on the trade agreement, I couldn’t be less optimistic about that,” he added. Negotiations on the TPP have come up against a number of stumbling blocks in recent years, predominantly from those working for Japan’s protected industries, like agriculture, autos and insurance. The opening up of these sectors would leave them exposed to the threat of foreign competition, a move which is being fiercely protested.

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Only 20% Of Americans Surveyed Believe In Big Bang (CNet)

Scientists express dismay at an Associated Press/GfK survey that suggests skepticism of science is still strong. Only 20% of Americans believe in the Big Bang. Less than one-third of Americans said they thought climate change was real.We Americans adore science when it gives us the iPhone or that little robot that cleans our floors all on its own. But please, please don’t force us to believe big, fat scientific theories. We’re not ready for that. We’re still too young. We’re still too enthralled by Hollywood movies, fast food, and instant cures for our spiritual ills.

There’s no reason, therefore, to be surprised or pained by an Associated Press/GfK survey that suggests a mere 20% of Americans believe in the Big Bang.We need a little more convincing to believe a random bang in outer space was the beginning of our Earth. We’re still happy to think it was the waft of a wand by an old man in a gray beard. To change our minds, we want evidence. We want proof. Oh, alright, sometimes we just want a good slap. But this survey delved deeper into our convictions about science. Less than a third of the 1,012 alleged adults surveyed last month thought climate change was a real thing caused by real humans.

A mere 27% would stand behind the peculiar notion that the Earth is 4.5 billion years old. Naturally the minute the AP contacted scientists to seek their opinion, they heard mostly the gurgling of angry craniums. Randy Schekman of the University of California, Berkeley, who managed to win a Nobel Prize in medicine last year, offered: “Science ignorance is pervasive in our society, and these attitudes are reinforced when some of our leaders are openly antagonistic to established facts.” Oh, Randy. I’ve had girls tell me they love me and that it’s an actual fact. It turned out to be a temporary actual fact.

Anthony Leiserowitz of the Yale Project on Climate Change Commission was equally hurt. He said the poll indicated evidence of “the iron triangle of science, religion and politics.” Naturally, I am tempted to ask him for the scientific proof behind such an assertion. Still, this isn’t the first survey that suggests Americans aren’t impressed by scientists’ claims to righteousness. A few months ago, a Pew survey revealed that 33% of Americans positively reject evolution. Which might explain why so many Americans never change at all.

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Keystone Pipeline Fate Now in Hands of Nebraskan Jurists (Bloomberg)

The focus of the Keystone XL debate has shifted from a fierce lobbying war in Washington to Lincoln, Nebraska, where the state Supreme Court has been asked to weigh a legal challenge to the pipeline. The U.S. State Department, which is responsible for reviewing whether the project is in the nation’s interest, said April 18 that it would delay making a recommendation until legal questions about the way the route was approved through the prairie state are resolved. That could spare President Barack Obama from having to decide on a project that splits supporters of his in the environmental and labor movements before an important congressional election in November.

“Once again, the administration is making a political calculation instead of doing what is right for the country,” Terry O’Sullivan, general president of the Laborers’ International Union of North America, said in an e-mail. “It’s clear the administration needs to grow a set of antlers, or perhaps take a lesson from Popeye and eat some spinach.” If the seven-member state Supreme Court upholds a lower court decision, TransCanada Corp., the Calgary-based company that wants to build Keystone, will need to apply to the Nebraska Public Service Commission. The commission by law has seven months for its pipeline reviews. “Effectively, this likely postpones the decision until after the U.S. mid-term elections,” Robert Kwan, an analyst with RBC Capital Markets, said in a research note yesterday.

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Biofuels Are Worse for the Environment Than Gasoline (Wire)

A new study finds that using biofuels made from corn harvest residue could actually increase carbon dioxide emissions in the short term, contrary to both popular belief and U.S. government environmental strategy. According to the report, published over the weekend in the scientific journal Nature Climate Change, using biofuels made from corn stover — stalks, leaves and cobs left over from corn harvests — can increase greenhouse gas emission by about seven percent more than gas in early years. That’s because removing the residue from the field, also takes carbon out of the soil where it’s needed. Phys.org explains the scientists’ methodology:

The researchers, led by assistant professor Adam Liska, used a supercomputer model at UNL’s Holland Computing Center to estimate the effect of residue removal on 128 million acres across 12 Corn Belt states. The team found that removing crop residue from cornfields generates an additional 50 to 70 grams of carbon dioxide per megajoule of biofuel energy produced (a joule is a measure of energy and is roughly equivalent to 1 BTU). Total annual production emissions, averaged over five years, would equal about 100 grams of carbon dioxide per megajoule — which is 7% greater than gasoline emissions and 62 grams above the 60 percent reduction in greenhouse gas emissions as required by the 2007 Energy Independence and Security Act.

This means, per the researchers, that these types of biofuels shouldn’t be considered a renewable fuel as it is defined by a 2007 energy law, even though they are beneficial in the long run. Which means that the U.S. government, which funded the study and has poured billions into the cellulosic biofuels, or plant-derived biofuels, might have to change course — if they accept the legitimacy of the research. According to the Associated Press reports, however, that’s not happening:

The biofuel industry and administration officials immediately criticized the research as flawed. They said it was too simplistic in its analysis of carbon loss from soil, which can vary over a single field, and vastly overestimated how much residue farmers actually would remove once the market gets underway. “The core analysis depicts an extreme scenario that no responsible farmer or business would ever employ because it would ruin both the land and the long-term supply of feedstock. It makes no agronomic or business sense,” said Jan Koninckx, global business director for biorefineries at DuPont.

DuPont is set to open a $200 million biofuel facility this year, so the company’s global business director might not be totally objective in assessing gains from biofuels. Last year, a DuPont-funded assessment found that their biofuels would be 100% better for the environment than gas. To be fair, the Environmental Protection Agency (EPA) had previously found that corn-based biofuels could stand up to the 2007 law’s standards if farmers leave enough residue on the fields. According to EPA spokesperson Liz Purchia, the study “does not provide useful information relevant to the life cycle greenhouse gas emissions from corn stover ethanol.” But the AP found last year that the EPA’s research into corn-based ethanol was faulty. And Liska stands by his team’s work. “I knew this research would be contentious,” he said, adding that “If this research is accurate, and nearly all evidence suggests so, then it should be known sooner rather than later.”

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‘Jobs vs. the Environment’: How to Counter This Divisive Big Lie (Nation)

In an era in which our political system is dominated by plutocracy, grassroots social movements are essential for progressive change. But too often our movements find themselves at loggerheads over the seemingly conflicting need to preserve our environment and the need for jobs and economic development. How can we find common ground?

The problem is illustrated by the current proposal of the Dominion corporation to build a Liquefied Natural Gas export facility at Cove Point, Maryland, right on the Chesapeake Bay. Seven hundred people demonstrated against the proposal and many were arrested in three civil disobedience actions. But an open letter on Dominion letterhead endorsing the project—maintaining it will “create more than 3,000 construction jobs” most of which will go “to local union members”—was signed not only by business leaders, but by twenty local and national trade union leaders.

In the struggle over the Keystone XL pipeline, which has been described as the “Birmingham of the climate movement,” pipeline proponents have been quick to seize on the “jobs issue” and tout support from building trades unions and eventually the AFL-CIO. In a press release titled “U.S. Chamber Calls Politically-Charged Decision to Deny Keystone a Job Killer,” the Chamber of Commerce said President Obama’s denial of the KXL permit was “sacrificing tens of thousands of good-paying American jobs in the short term, and many more than that in the long term.” The media repeat the jobs vs. environment frame again and again: NPR’s headline on KXL was typical of many: “Pipeline Decision Pits Jobs Against Environment.” A similar dynamic has marked the “beyond coal” campaign, the fracking battle and EPA regulation of greenhouse gasses under the Clean Air Act. Those who want to overcome this division must tell a different story.

One starting point for that story is to recognize the common interest both in human survival and in sustainable livelihoods. To paraphrase Abraham Lincoln, if God had intended some people to fight just for the environment and others to fight just for the economy, he would have made some people who could live without money and others who could live without water and air. There are not two groups of people, environmentalists and workers. We all need a livelihood and we all need a livable planet to live on. If we don’t address both, we’ll starve together while we’re waiting to fry together.

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Not surprised.

Monsanto’s RoundUp 125 Times More Toxic than Regulators Admit (NatSoc)

A new study just published in the journal Biomedical Research International reveals that despite the still reputation of agrochemicals being relatively harmless, formulations like Roundup herbicide are far more toxic than regulators have previously revealed. So – either they already knew this and refused to share it with the public, or some of them just had no idea how powerfully debilitating these chemicals could be when used together. Many regulatory agencies administer tests to look at isolated chemicals to determine in what parts per million they become toxic to humans and the environment. Far too many chemicals are used than the agencies have the capability and funds to actually test for any length of time to determine their true interaction with other chemicals already in the environment.

But this study goes even further, and determines that RoundUp – and its combined chemical ingredients – are 125 times more toxic than glyphosate alone. Isolating a chemical completely loses the synergistic effect of the compound interactions that take place between multiple chemicals, and therefore does not give an accurate picture of what the chemical(s) can do. Any biologist or chemist could tell you this. The study, titled “Major pesticides are more toxic to human cells than their declared active principles,” looks at the ‘inert’ chemicals, or the adjuvants, in 9 major chemical groups that are used globally in agricultural practices due to Big Ag monopolies: 3 herbicides, 3 insecticides, and 3 fungicides.

“Pesticides are used throughout the world as mixtures called formulations. They contain adjuvants, which are often kept confidential and are called inerts by the manufacturing companies, plus a declared active principle (AP), which is the only one tested in the longest toxicological regulatory tests performed on mammals. This allows the calculation of the acceptable daily intake (ADI)—the level of exposure that is claimed to be safe for humans over the long term—and justifies the presence of residues of these pesticides at “admissible” levels in the environment and organisms. Only the AP and one metabolite are used as markers, but this does not exclude the presence of adjuvants, which are cell penetrants.”

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Hard to say what’s going to come out of this one. How bad are the lies so far?

Fukushima Radiation Killing Our Children, Tokyo Hides Truth: Former Mayor (RT)

Katsutaka Idogawa, former mayor of Futaba, a town near the disabled Fukushima nuclear plant, is warning his country that radiation contamination is affecting Japan’s greatest treasure – its children. Asked about government plans to relocate the people of Fatuba to the city of Iwaki, inside the Fukushima prefecture, Idogawa criticized the move as a “violation of human rights.” Compared with Chernobyl, radiation levels around Fukushima “are four times higher”, he told RT’s Sophie Shevardnadze, adding that “it’s too early for people to come back to Fukushima prefecture.” “It is by no means safe, no matter what the government says.”

Idogawa alleges that the government has started programs to return people to their towns despite the danger of radiation. “Fukushima Prefecture has launched the Come Home campaign. In many cases, evacuees are forced to return. [the former mayor produced a map of Fukushima Prefecture that showed that air contamination decreased a little, but soil contamination remains the same.]” According to Idogawa there are about two million people residing in the prefecture who are reporting “all sorts of medical issues,” but the government insists these conditions are unrelated to the Fukushima accident. Idogawa wants their denial in writing. “I demanded that the authorities substantiate their claim in writing but they ignored my request.”

Once again, Idogawa alludes to the nuclear tragedy that hit Ukraine on April 26, 1986, pleading that the Japanese people “never forget Chernobyl.” Yet few people seem to be heeding the former government official’s warning. “They believe what the government says, while in reality radiation is still there. This is killing children. They die of heart conditions, asthma, leukemia, thyroiditis… Lots of kids are extremely exhausted after school; others are simply unable to attend PE classes. But the authorities still hide the truth from us, and I don’t know why. Don’t they have children of their own? It hurts so much to know they can’t protect our children. “They say Fukushima Prefecture is safe, and that’s why nobody’s working to evacuate children, move them elsewhere. We’re not even allowed to discuss this.”

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Can You Put A Price On The Beauty Of The Natural World? (Monbiot)

George Orwell warned that “the logical end of mechanical progress is to reduce the human being to something resembling a brain in a bottle”. This is a story of how it happens. On the outskirts of Sheffield there is a wood which, some 800 years ago, was used by the monks of Kirkstead Abbey to produce charcoal for smelting iron. For local people, Smithy Wood is freighted with stories. Among the trees you can imagine your way into another world. The application to plant a motorway service station in the middle of it, wiping out half the wood and fragmenting the rest, might have been unthinkable a few months ago. No longer.

When the environment secretary, Owen Paterson, first began talking about biodiversity offsetting – replacing habitats you trash with new ones created elsewhere – his officials made it clear that it would not apply to ancient woodland. But in January Paterson said he was prepared to drop this restriction as long as more trees were planted than destroyed. His officials quickly explained that such a trade-off would be “highly unlikely” and was “very hypothetical”. But the company that wants to build the service station wasn’t slow to see the possibilities. It is offering to replace Smithy Wood with “60,000 trees … planted on 16 hectares of local land close to the site”. Who cares whether a tree is a hunched and fissured coppiced oak, worked by people for centuries, or a sapling planted beside a slip-road with a rabbit guard around it?

As Ronald Reagan remarked, when contemplating the destruction of California’s giant redwoods, “a tree is a tree”. Who, for that matter, would care if the old masters in the National Gallery were replaced by the prints being sold in its shop? In swapping our ancient places for generic clusters of chainstores and generic lines of saplings, the offsetters would also destroy our stories.

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Peak Soil: Are We Taking More Than the Earth Can Give? (Oilprice.com)

There is a tendency for humans to perceive ill occurrences as unconnected events, rather as the Biblical plagues of Egypt: water into blood, frogs, lice, wild animals or flies, deceased livestock, boils, storms of fire, locusts, darkness and death of the firstborn. Scientists now believe that these events really happened, but they were in fact all results of a single cause: not the wrath of a punitive God, but climate change. Modern humans are aware of contemporary global menaces: a changing climate, peak oil, a dodgy economy that could collapse at any moment, and the extinction of honey bees, but relatively few of us know that the world’s productive soils are also under threat.

What has been most noticeable is that the price of food and fuel has increased markedly over the past decade, during when we have also experienced an economic crash. We fear another such shock, even amid whispers of “growth”, which can only be expected to be of a slow stuttering kind, since we cannot significantly grow our rate of production of resources. Thus, the price of a barrel of crude oil has more than trebled since 2004, while global production has practically flat-lined at around 75 million barrels a day over that same period, leading to the view that we have reached the ceiling of our oil supply.

Given that all components of human civilization are inextricably linked to petroleum, either as a chemical feedstock or a fuel, if we cannot elevate our production rate of oil, nor can we grow the global economy. The troubles of the human condition, however, are more fundamental, since we are steadily using-up Mother Earth’s bestowal to us of fertile soil. This has been dubbed “peak soil” in analogy with “peak oil”, and while the two phenomena are not of the same kind, they are connected, as indeed are all the elements listed in the title of this article: soil, land, water, climate (change), honeybees, oil and food. Alice Friedmann wrote, in the context of the unsustainable nature of growing land-based crops and producing biofuels from them.

“Iowa has some of the best topsoil in the world, yet in the past century it’s eroded from an average of 18 inches to less than 10 inches (Pate 2004, Klee 1991). When topsoil reaches 6 inches or less (the average depth of the root zone in crops), productivity drops off sharply (Sundquist 2005). Soil erodes geologically at a rate of about 400 pounds of soil per acre per year (Troeh 2005). But on over half of America’s best crop land, the erosion rate is 11,000 pounds per acre, 27 times the natural rate, and double that on the worst 7% of cropland (NCRS 2006), partly because farmers aren’t paid to conserve their land, and partly because hired farmers wrench every penny of profit they can on behalf of short-sighted owners.”

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